The Components of a Business Plan Explained
The Executive Summary should adequately summarize the entire business plan. It should excite the reader while specifying who you are, what you are doing, why you are doing it, how successful you will be and what you want from them in order to do it. The summary should be succinct but specific and detailed in important sections. Keep the prospective audience in mind when creating this section. That is, a potential lender or investor should be able to pick up the business plan, read the executive summary, and then have a concrete idea of what the business will do and how the goals will be achieved without reading the entire plan. The executive summary will be the most read section of the business plan, so it is crucial not to disregard it. It should capture interest and promote curiosity. The executive summary sells the business plan - which is you, your vision, and its potential for success.
Typically, the executive summary should be 1 to 1 ½ pages in length and never more than 3 pages. More important than the length is that this section should be direct and well organized but sufficiently long and detailed to convey the mission of the business and the operations.
This section should be completed last, as it is easier and more precise to summarize the entire plan after the plan is completed. You will have to know all the details of your plan before you can summarize them.
The purpose of this section is to describe the type of industry you are in, how your company fits within that industry and specifically what products and/or service you will offer.
Describe the entire industry you are entering, such as the restaurant, printing, or clothing retail industry. Statistically present the current status and prospects for the industry. Is the industry growing, if so, then in what areas of the country? Statistically, who is the consumer for this market? Discuss new products and developments, new markets and customers, and any other trends that could affect the business. Identify all sources of information used to describe these trends. These sources may be found in public libraries, the Internet or industry specific associations and journals. This section should paint a very clear picture of the type of industry you are entering into, such that the layman will understand it. You should not discuss your business under this section.
This section fully describes how your company fits into the industry, and what niche or market segments it will serve. Your company will not be able to serve all segments of the industry. Example: The restaurant industry involves fine dining, sit-down casual, and fast food, just to name a few. What makes your company different? Where will it be located? Who are the owners and how is the company legally formed – sole proprietor, partnership, or corporation? Although the basics are discussed later regarding company formation, consult your attorney or CPA for which form of corporation, partnership, or sole proprietorship is best for you. Upon completion of this section, the reader should fully understand the basics of your company.
Describe in detail the products or services to be sold or offered, as well as the application of your product or service. Emphasize any unique features of your product or service and highlight differences between what is currently on the market and what you will offer. Specific vendor (supplier) lists should be placed in the appendix and fully described here. Remember you must know what products you will offer and where the products will come from; therefore, it is imperative at this point to obtain as much information about your vendors as possible. Often, they will send you catalogs that will include merchandise, wholesale and retail pricing, which will help you later in your business plan.
If a new product / service is being developed, define the current state of development and include a photograph, if applicable. Describe patents, trade secrets, or other proprietary features. Discuss any head start that you might have that would enable you to achieve a favorable position in your industry.
This is the first section you will complete when writing your business plan, even though it appears third. The purpose of this section is to present enough facts to determine if your product or service has a substantial market and whether there is an opportunity for success. You will often hear of this section referred to as a feasibility study, whether or not you should start your business. It is one of the most difficult sections to prepare and also one of the most important. All subsequent sections of the business plan depend on how well this section was developed. The sales levels you project, based on the market research and analysis, directly influence the size of the operation, the marketing plan, and the amount of debt and equity capital required. Allow plenty of time to concentrate on this section and check alternate sources of market data – make an informed decision about your business idea now, NOT later.
Although your company may have a diverse range of consumers, you cannot afford to target everyone. You will find that one segment is more predominate than others. This segment is your target market, the one you will spend your advertising dollars to reach. Often you will hear them referred to as your “bread and butter” because they are providing you with the most sales. Describe your target and be specific. Identifiers should include aspects such as age, race, sex, religion, and income when applicable. Describing your target customer should not take more than three sentences.
Example: My target customer is a single Caucasian male, 35-45 years of age with a median household income of $35,000 who resides within the zip codes 29210, 29211 or 29212.
Once your target market is identified, take time to describe their habits. What is the basis for their purchase decision: price, quality, service, personal contact, or some combination of these factors?
In addition to your target customer, you may have secondary markets, which you may want to explore. List each of them and why you consider them as a source of significant sales revenue. Keep in mind that almost anyone could be your customer and you need to focus only on specific segments to target, not everyone.
Once you have identified the target customer, you must statistically define how many there are in your market area, whether they are growing or not and what future projections are for that area. This information is available through the Census Bureau and often at your local Council of Governments. Describe the primary market for your product, both geographically and in terms of total sales volume. Also, describe the seasonal fluctuations and the potential annual growth of the total market for your product or service, and discuss the major factors affecting that growth (industry trends, economic trends, government policy, population shifts).
Identify all direct competitors, other companies offering the same product/service as you. Make a realistic assessment of the strengths and weaknesses of the competitors. Compare these competing products or services on the basis of price, performance, service, warranties, and other pertinent features. Present a short discussion of the current advantages and disadvantages of competing products and services and state why they are not meeting customer needs.
Identify secondary competitors, places your product or services may be available. Often these will include the large department stores. Example: A bridal store may identify several other bridal shops as prime competitors. However, they may have several department stores such as Richs, Dillard’s or Parisians in their area that also sell bridal gowns. Bridal gowns are not the departments store main attraction and would be a secondary competitor to a bridal specific store.
Once you have identified who your customers are, how many there are, if the segment is growing or not and who is servicing your customer, you are ready to make an educated guess as to how much of the market you will be able to capture. Summarize what it is about your product or service that will make it marketable in the face of current and potential competition. If your business is such that 50% or more of your sales are to a few customers, find out if any are willing to make purchase commitments and, if possible, attach their commitment letters or letters of intention to your plan. Anything that can substantiate past and/or future sales activity will strengthen this section. Discuss which customers would be major purchasers in the firm and why. Based upon your assessment of the advantages of your product or service, market size and trends, customers, the competition and their product, and the sales trend in prior years, estimate your share of the market and your sales in units and dollars for the next two years. Be sure to state any assumptions upon which your projections are based. Yes, this is estimation but it is an educated estimation and must have substantiation.
The actual sales figure will be developed from the amount of intended market penetration and your pricing (which is discussed later). Often the new entrepreneur is tempted to look at their expenses, add them up and predict sales from their known expenses. While sales do need to cover expenses and some are related to sales generation, expense is not the proper way to forecast potential income.
Describe the general marketing philosophy and strategy of the company. This should be derived from marketing research and evaluation. It should include a discussion of what kinds of customer groups will be targeted for initial intensive sales promotions as well as which groups will be targeted for later sales efforts. Your marketing strategy must be consistent with your image, which is determined by your target customer.
The pricing policy is one of the most important decisions you will have to make. The price must be right to penetrate the market, maintain a market position, and produce profits. Often vendors can help you determine this for your area by use of a suggested manufactured retail price. Also industry specific associations are a good source to determine standard mark-up. Some pricing is industry-driven, some area-driven. Example: A business consultant in New York City may make $250 an hour, in Atlanta, GA $150 an hour, and in Columbia, SC $75 an hour. All are equally qualified. If a consultant in Columbia decided to charge $250 because that is what consultants in New York earn, he/she will soon find him/herself out of business because the local market will not bear that price.
Discuss prices to be charged for your product or service, and compare your pricing policy with that of your major competitors. Does it make sense? Continuously re-evaluate your pricing decisions and do not be afraid to change them. Pricing is an on-going process. Also, remember that pricing may project an image. Is that image consistent with the mission of the business?
Describe the methods that will be used to make sales and distribute the product or service. Will the company use its own sales force, independent sales representatives, or distributors? Discuss the margins to be given to retailers, wholesalers, and salesmen and compare them to those of your competition, if you can find this depth of competitive information.
Most small business owners view promotion and advertising as a “luxury” that they cannot afford. Unfortunately, this usually results in ineffective promotion and poor results. You should assess your potential customers and competition and the business’ products and services to determine a promotional/advertising strategy. You can then develop a budget to determine the most cost-effective method of promotion.
Many small businesses advertise effectively via local media such as daily or weekly newspapers, shopping guides, flyers, radio, and direct mail. More specialized businesses may advertise in trade magazines, business directories, travel guides, and tourist publications. A small business may also gain recognition by joining the local chamber of commerce and may also donate goods or services to charitable events. Promoting the business does not have to be expensive. But you must develop a budget and a plan to effectively reach your target markets.
It is important to realize the difference between promotion and advertisements. Promotions are those events that attract people to stop by your store. An advertisement is designed to develop name recognition. Therefore, it is imperative that your advertisements be consistent utilizing the same logo and appearance so that the potential consumer can develop a mental image of your business.
Describe approaches the company will use to bring its product to the attention of prospective purchasers. A schedule and associated costs for advertising and promotion should be presented. Be sure to utilize the most cost effective way to reach your target audience. All media will reach some of your target, but which one reaches the most at the best price? A few types of media include: direct mail campaigns, local newspapers, radio, billboards, networking with local chambers and associations, trade shows, participating in local events, and sponsoring local organizations. This is an accurate schedule of how you intend to advertise and promote your business. Quotes should be obtained and placed in the appendix.
Promotion Example: I will have a grand opening event on June 30, 2010. I will have local radio station WXQZ106 present at a cost of $500. I will have Joe’s Catering cater the event at a cost of $1,200. In addition I will have balloon give-a-ways available at a cost of $500. The total cost for the event will be $2,200.
Advertising Example: I will run a ¼ page ad in the State newspaper, every Friday for 3 months at a rate of $400 per week for a total cost of $4,800.
The operating plan should describe facilities, location, space requirements, equipment, and labor force that are required to provide the company's product or service.
The discussion guidelines given below are general enough to cover different businesses. Only those that are relevant to your particular business should be addressed in your business plan.
Describe the planned location of the business and discuss the advantages and disadvantages of the site in terms of wage rates, labor availability, proximity to customers and suppliers, access to wholesalers, distributors, and transportation, state and local taxes and laws, utilities, and zoning, and rent/purchase cost. This should be the exact intended location. Remember don’t commit to anything until your funding is approved.
The choice of location is important to the success of your business and should be determined early in the planning process. Site requirements will vary depending on the type of goods or services offered by the business. You must consider location in regard to customers, suppliers, employees, and government regulations. You should outline the business’ needs and select a site, which best meets these requirements. Further, you should evaluate the options of buying or renting the business site.
If leasing the location you should determine: How is rent calculated? Is the rent reasonable for the area? Who is responsible for improvements? Who will own such improvements? Are there options for expansion? Are there any restrictions on the property’s use? What are the lease renewal provisions? A licensed commercial real estate agent will be able to answer these questions and guide you through the leasing process. If possible, include a tentative lease/purchase agreement in the appendix. Location should be determined by market research and not by personal convenience.
Discuss the current facilities and what modifications will need to be made. Include a contractor’s rendition of improvements and a quote in the appendix. If necessary, discuss how and when space and equipment will be expanded to the capacity required for future sales projections.
Discuss hours of operation and holiday schedules that will be employed to meet your customer’s demands. Explain why this is important to your consumer.
Manufacturers should describe the process involved in production of the product or service. Present a plan that shows cost-volume information at various sales levels of operation with a breakdown of material, labor, purchased components, and overhead. Also, briefly describe your approach to quality, production, and inventory controls. Explain the quality control and inspection procedures the company will use to minimize service problems and ensure customer satisfaction.
Exclusive of management functions, does the local labor force have the necessary skills, in sufficient quantity and quality, to produce the product? If their skills are inadequate, describe the training that you would use to upgrade them. List how many of each type employee, at what rate, and for how many hours you will employ him or her each week. How will this change with sales volume increase? At what levels will you add personnel?
The management team is the key to turning a good idea into a successful business. Bankers and investors look for a committed management team with a balance of technical, managerial, and business skills. List key management personnel and their primary duties. This is the section that you utilize to sell yourself to the potential lender. State why you believe your credentials will help to ensure success. Include résumés of all key personnel in the appendix.
State the percentage of ownership and salary that is to be paid to each owner. If applicable, set forth stock ownership planned for key personnel, the amount of their equity investment, and any performance-dependent stock options or bonus plans that are contemplated.
The proposal should include a description of the organizational structure. In a table or diagram, present the key management roles in the company and the individual who will fill each position. Discuss any current or past situations where the management personnel have worked together, and indicate how their skills complement each other and result in an effective management team.
Discuss the company's philosophy as to the size and composition of a board of directors. Identify proposed board members and include a short statement about each member’s background. If available, place their résumé in the appendix.
The financial plan is basic to the evaluation of a business opportunity and should represent your best estimate of future operations. It can also serve as an operating plan for your management team.
In developing a financial plan, several basic forecasts must be prepared. Many decisions will be based on what you present here. At the appropriate time, your advisors may recommend some changes, but it is vitally important that you apply your best efforts in formulating these forecasts.
Most of the required information you have already developed in your business plan. Any funding institution requires the following documents.
· Sources and Uses of Funds - Please refer to Exhibit I
· 24-month pro forma cash flow analysis - Please refer to Exhibit II
· 3 year profit and loss forecasts (2 year minimum) - Please refer to Exhibit III.
· 3 year pro forma balance sheet - Please refer to Exhibit IV.
For an existing business, balance sheets and income statements for the current and previous three years should be provided. Often tax records are the easiest way to obtain this information. After you have completed preparation of the financial exhibits, briefly highlight the important conclusions that can be drawn. Finally, explain all of your assumptions and the sources of your data.
The appendix should consist of supporting documents that help outside sources get a better overall picture of your business. It is important that the information presented in your appendices logically supports the message that you are trying to project about your business. All documents in your appendix should be referenced in the body of your business plan after they were mentioned. Example: According to the national Restaurant association 2003 survey, the restaurant industry has experienced 25% growth annually since 1989 (see appendix A). The appendices are labeled A-Z in accordance to how they appear in your business plan. A rule of thumb: If you think someone may want to see it, reference it and place it in the appendix. More information is better than not enough but be careful not to swamp your reader with irrelevant information.
Samples of items to be placed in the Appendix
· Résumés for key personnel
· Company brochure or literature
· Physical layout/Floor plan of business
· Picture/Map of location
· Price lists
· Capital equipment list
· Advertising sampler
· Testimonials/Letters of support
· Lease or purchase agreements
· Charts and graphs to support marketing data