Appendix: A Detailed View of How to Write a Business Plan*
Writing a business plan is the most important facet of starting a business.
AFTER YOU HAVE your big idea, the very next thing you should work on is your business plan. As we’ve seen, the business plan has several purposes. It captures your ideas on paper and keeps track of the steps you’ve taken or will take to start the business. It’s also a major requirement in acquiring financing for your business. No one will want to help you start your business unless you can convince them that your plan will keep your business from crashing soon after takeoff.
Below, you will find a detailed guide for writing the sections that make up a basic business plan. We’ve written it with a funding request in mind; if you are creating your plan for your own reference, use your own judgment about the level of detail and items you include. Naturally, if you are writing your plan to test the idea of starting a certain business, you won’t have any history to report either. It may help you to think of the project as writing several connected, self-contained reports.
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The EXECUTIVE SUMMARY is the first part of a business plan and is the most crucial piece. It provides a very concise synopsis of the entire plan, along with a brief history of your company (if there is one). This portion tells readers what your business is or will be, and where you want to take it. It’s the first thing your readers see; it will either grab their attention and make them want to keep learning, or make them want to close the cover and move on to something else. Most importantly, this part of the plan tells why you believe your business will be successful.
Here’s a tip: The Executive Summary is most easily and effectively written after you finish writing the rest of your business plan. Once all of the details of your plan are in order, you will be prepared to condense it into the Executive Summary. Try to keep this section to fewer than four pages.
Included in the Executive Summary are:
• Mission Statement: The Mission Statement briefly explains the focus of your business. The statement can technically be any length, although we recommend shooting for two to three sentences. It should be as direct and concise as possible and it should leave the reader with a clear picture of what your business is all about.
• When the business was started
• Key management and their roles
• Number of employees
• Primary and other locations of the business
• Description of office, manufacturing plant, or facilities
• The products or services
• Current investor information and any additional financial relationships or arrangements
• Brief summary of your company’s financial accomplishments and any noteworthy market activities (e.g., your business tripled its value in a one-year period or you became the leader in your industry by developing a certain product)
• Briefly describe management’s plans for the business’s future.
With the exception of the Mission Statement, the information in the Executive Summary should be presented in a brief or bulleted style. Note that this information is expanded upon in greater detail within the remainder of the business plan.
If you are just starting a business, you most likely will not have a lot of information to populate all the fields mentioned above. As an alternative, focus on your experience, background, and the decisions that led you to start the business. Ensure that it contains information about the needs your target market has and what solutions your business will provide. Explain how the business experience you have will allow you to make meaningful advances into the market. Point out what you’re going to do uniquely or more effectively than your competition. Show that there is a definite need for the product or service provided by your business, then address the business’s prospective plans.
To help the reader in pinpointing specific sections within your business plan, provide a table of contents immediately following the Executive Summary. The content titles should be very broad; try not to include too much detail.
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The MARKET ANALYSIS portion is Part Two of a well-written business plan. It should demonstrate your knowledge of the particular industry that your business plans to enter. It should also provide basic statistics and key information of any market research data you have obtained. However, the itemized details of your market research studies should be placed in the Appendix section of the business plan.
This part of the business plan should include a description of the industry, target market facts and information, market test results, timeframes, and an evaluation of your competition.
The Industry Description section should include an overview of your primary industry: industry size, current and trailing growth rates, market trends and characteristics relating to the entire industry. What is the life-cycle stage of the industry? What is the industry’s expected growth rate? It should profile the major customer groups within the industry (businesses, governments, women over 35 years of age, children under five, etc.). This can be broad or narrow, depending on the size and scope of the industry and the business you are in.
The business’s target market is the customer base that it aims to supply products or provide services to. When defining a target market, it’s vital to narrow the group to a realistic size. Often, businesses make the fatal miscalculation of trying to offer something to everybody. This approach typically ends in failure.
Within the Target Market section, you should report information that identifies the following:
• Key characteristics of the primary group you are targeting. This segment should include information about the critical needs of your future customers, the level to which those needs are currently being met, and the demographics of the group. Ensure you also include the geographic location of your target market; identify the key decision-makers, and any seasonal or cyclical trends that may impact the industry or your business model.
• Size of the target market. Here, you should report the number of potential customers in your primary market, the amount of annual purchases they make relative to products or services at par with your own, the geographic area they inhabit, and the expected market growth for this group.
• The magnitude of market share you expect to capture and the reasons why. When gathering this information, you need to decide how much market share and how many customers you expect to gain in a specific geographic region. In addition, you should provide the reader with an understanding of the reasoning you used in developing these estimates. Some businesses, for example day care centers, may be limited by law to the number of customers they can serve. Explain these things here if they apply.
• Pricing and gross margin expectations. In this section, it would be wise to define the structure of your pricing, your gross margin requirements, and any discounts or incentives that you plan to offer through the business, such as large-volume purchasing, bulk discounts, or prompt payment discounts that discourage customers from taking advantage of payment terms.
• A list of target market research and information sources. These resources can be purchased demographic research, directories, business associations, industry publications, and government documents. Or you can do your own digging.
• Media your business will use to reach the target audience. The media may include Internet marketing, Internet radio, conventional radio, trade shows, public speaking, networking, television, magazines, periodicals, flyers, or any other type of engaging media that has the potential to touch your target audience.
• Buying patterns of your target market. The first steps are to identify the needs of the potential consumers, conduct research in order to see how to address their needs, review the possibilities, and identify the person or persons that can put your offering in front of buyers.
• Trends that affect your potential customers, coupled with fundamental features of any secondary markets. As with the primary target market, it is important to pinpoint the needs, demographics and developing trends that are going to affect the secondary markets later.
Include information about any of the market tests already completed in this section. Specific details should be included in the Appendix. Market studies usually include the target customers who were contacted, all data or information that was provided to prospective customers, how critical satisfying their needs really is, and the target market’s willingness to purchase products or services at a blend of different price-points from your business.
If appropriate, detail lead-time considerations. Lead-time is the required amount of time from when a customer places an order until the moment the product or service is delivered. When you research this information, determine your lead-times regarding initial orders, re-orders, and bulk purchases.
While conducting a competitive analysis (often called a SWOT Analysis—Strengths, Weaknesses, Opportunities and Threats), it is critical to identify the competition’s product lines or services and market segment. Use this information to determine their strengths and weaknesses, understand the relationship between your target market and your competitors, and identify any opportunities and threats that may affect how you will enter the marketplace.
Also, be certain that you identify all of the primary competitors for each of the products or services offered. For each key competitor, determine their market share. Then try to predict when new competitors will enter into the marketplace. How long will your window of opportunity last? Finally, pinpoint any additional or less impactful competitors that may have an effect on your success. Your competitors’ strengths or competitive advantages might become advantages that you too provide. These strengths can be found in many different areas of the business. They typically include:
• An ability to service customers’ needs
• The ability to hold a great deal of market share (consumers’ brand awareness comes with that)
• Years in business as a trusted organization
• Great financial position, ensuring that they can survive as a business through thick and thin
• Exceptional management or personnel
Weaknesses are easy to understand, as they are simply the opposite of strengths. However, it is important to analyze the same areas as you did for strengths, in order to determine the weaknesses of your competition. Do they satisfy the needs of their customers? What is their current market penetration? How well do the target audiences and the public view them in regard to past performance, trust, and reputability? Are they experiencing financial constraints or limitations? These could all be red flags for any business. If you discover weak spots in the competition, learn why these problems exist, so you can avoid them.
In the event that your target audience is not shared with your competition, you should be able to grow your idea with little resistance. However, if the competition is hungry for your target market, too, you should plan to handle the known roadblocks on your way to success. Some issues you may uncover include:
• High start-up costs
• Significant time required to get your idea off the ground
• Constantly evolving technologies
• Shortage of skilled personnel
• Customers unfamiliar with your company, product or service
• Current intellectual property laws such as patents and trademarks which may inhibit your ability to innovate
The last section that requires research here is the section covering restrictions and regulations. This includes information related to employees, customers, government regulations, and any other future changes. Important items that need to be addressed include steps necessary to conform to any current or pending requirements that affect your business, as well as the timeframe involved. When does your business have to be in compliance? On what date do these changes take effect? What resources do you need in order to conform?
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The COMPANY DESCRIPTION is Part Three of your business plan. While keeping the finer details limited, provide the reader with a brief understanding of how all of the different components of your business work together. A company description typically provides information about the fundamentals of the business, along with a breakdown of the key factors that will lead to the business’s success.
When providing the fundamentals of the business, it is important to include detail on the needs of the marketplace that you are trying to satisfy. Ensure you provide detail on the initiatives that you expect will satisfy these needs. Last, provide a breakdown of key individuals and major organizations that have these needs.
Fundamental factors of success typically include an ability to satisfy your customers’ needs better than the competition, time- and cost-effective processes of providing products or services, valuable personnel, and quite often, a prime location. Any, or all, of these can be a competitive advantage.
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The ORGANIZATION AND MANAGEMENT section is Part Four to a well-written business plan. This section provides profiles of key members of management. At a minimum, it should include an organization chart that shows the structure of the organization, profiles of key management and Board of Directors (if you have one), and other important ownership information.
The initial subsection of the Organization and Management portion of the business plan should describe structure of your organization. The most effective and cleanest way to show the company’s structure is to provide readers with an organizational chart and narrative description. This will demonstrate to your readers that you leave nothing to chance, that a comprehensive plan is in place, and that the most appropriate employee is in charge of each function of the business. Drawing one up can sometimes reveal problems (like who reports to whom, or that one person in fact has two bosses) that you can address before they fester. Potential investors and employees alike find this very important.
Profiles of key management typically follow the organization’s structure, listing each key member from top to bottom on your chart. What are the individual roles and responsibilities for members of management? What are their education and employment backgrounds and why are they being brought into the business as a member of the board or senior manager? These details may appear unnecessary in one- or two-person businesses; however, individuals, especially investors, reading the business plan, expect to know everyone’s role and level of experience. Provide a well thought-out, detailed write-up, including the function of each department or facet of the business.
One of the most important components for success in the growth of any company is the ability and track record of its owner and management team. Let your readers know about the key people in your company and their backgrounds. Provide résumés that include the following information:
• Name
• Title (include a brief position description along with primary duties)
• Primary responsibilities and authority
• Education
• Unique experience and skills
• Prior employment
• Special skills
• Past track record
• Industry recognition
• Community involvement
• Number of years with the company
• Compensation basis and levels (if you are setting these for the first time, make sure these are reasonable—not too high or too low)
Ensure you quantify achievements (e.g., “Managed a sales force of ten people,” “Managed a department of fifteen people,” “Increased revenue by 15 percent in the first six months,” “Expanded the retail outlets at the rate of two each year,” “Improved the customer service as rated by our customers from a 60 percent to a 90 percent rating”).
Also, highlight how the people surrounding you complement your own skills. If you’re just starting out, show how each person’s unique experience will contribute to the success of your venture.
While not all businesses have a Board of Directors, the major benefit of an unpaid advisory board is that it can provide expertise that your company cannot otherwise afford. A board composed of well-known, successful business owners or managers can go a long way toward enhancing your company’s credibility and perception of management expertise.
If you have a Board of Directors, be sure to gather the following information when developing your business plan:
• Names
• Positions on the board
• Extent of involvement with the company
• Background
• Historical and future contribution to the company’s success
Conclude this section by providing details regarding the legal structure of the business, followed by the ownership information. Is the business incorporated? What type of incorporation is it? Maybe you have an LLC or partnership. Or are you are set up as a sole proprietorship?
The following ownership information is important and necessary for the Organizational Structure section of a successful business plan:
• Owners’ names
• Member interest breakdown (who owns how much)
• Company involvement
• Ownership types (such as common and preferred stock, general partner, limited partner)
• Any other existing equity equivalents such as warrants, options, convertible debt, etc.
• Common stock
The MARKETING AND SALES STRATEGIES section is Part Five of your business plan. Marketing is the process of creating customers, the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy. Your strategy should be part of an ongoing business-evaluation process and be unique to your company. However, there are common steps you can follow to help you think through the direction and tactics you would like to use to drive sales and sustain customer loyalty.
An overall marketing strategy should include, at a minimum, these four strategies:
• A market penetration strategy
• A growth strategy. This strategy for building your business might include an internal strategy such as how to increase your human resources, an acquisition strategy such as buying another business, a franchise strategy for branching out, a horizontal strategy where you would provide the same type of products to different users, or a vertical strategy where you would continue providing the same products but would offer them at different levels of the distribution chain.
• Channels of distribution strategy. Choices for distribution channels could include original equipment manufacturers (OEM’s), an internal sales force, distributors, or retailers, licensees, and sister or daughter companies under a larger umbrella.
• Communication strategy. How are you going to reach your customers? Usually, a combination of the following tactics works the best: promotions, advertising, public relations, personal selling, and printed materials such as brochures, catalogs, flyers, etc.
After you have developed a comprehensive marketing strategy, you can then define your sales strategy. This covers how you plan to actually sell your products or services.
Your overall sales strategy should include two primary elements:
• A sales force strategy. If you are going to have a sales force, do you plan to use internal or independent representatives? How many salespeople will you recruit for your sales force? What type of recruitment strategies will you use? How will you train your sales force? What about compensation?
• Your sales activities. When you are defining your sales strategy, it is important that you break it down into activities. For instance, you need to identify your prospects. Once you have made a list of your prospects, you need to prioritize the contacts, selecting the leads with the highest potential to buy first. Next, identify the number of sales calls you will make over a certain period of time. From there, you need to determine the average number of sales calls you will need to make to win an order, the average sale per order, and the average sale per customer in a given period of time.
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The SERVICE OR PRODUCT LINE section is Part Six of your business plan. What are you selling? In this section, describe your service or product, emphasizing the benefits to potential and current customers. For example, don’t tell your readers which 89 foods you carry in your Gourmet-to-Go shop. Tell them why busy, two-career couples will prefer shopping in a service-oriented store that records clients’ food preferences and caters to even the smallest parties on short notice.
Focus on the areas where you have a distinct advantage. Identify the problem in your target market for which your service or product provides a solution. Give the reader hard evidence that customers are, or will be, willing to pay for your solution. List your company’s services and products and attach any marketing or promotional materials. Provide details regarding suppliers, availability of products or services, and product or service costs. Also include information addressing new products or services which will soon be added to the company’s line.
This section should include:
• A detailed description of your product or service (from your customers’ perspective). You should include information about the specific benefits of your product or service. You should also talk about your product or service’s ability to meet consumer needs, or any advantages your offering has over the competition’s.
• Information related to your product’s life cycle. Include information about where your product or service is in its life cycle (e.g. idea, prototype, etc.), as well as any factors that may influence its cycle in the future.
• Any copyright, patent and trade secret information that may be relevant. This should include information related to existing, pending or anticipated copyright and patent filings along with any key characteristics of your products or services for which you cannot obtain a copyright or patent. This is where you should also incorporate key aspects of your products or services that may be classified as trade secrets (while not disclosing the secrets themselves). Last, but not least, be sure to add any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
• Research and development (R&D) activities you are involved in or are planning to be involved in, including any in-process or future activities related to the development of new products or services. This section should also cover information about what you expect the results of future R&D activities to be. Be sure to analyze the R&D efforts of not only your own business, but also that of others in your industry.
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The FUNDING REQUEST is Part Seven of your business plan, if that is your purpose for this version of your plan. In this section, you will request the amount of funding you will need to start or expand your business. If necessary, you can include different funding scenarios, such as best- and worst-case scenarios. Remember that later, in the Financial section (see below), you must be able to back up these requests and scenarios with corresponding financial statements.
You will want to include the following in your funding request:
• Your current funding requirement
• Your future funding requirements over the next five years
• How you will use the funds you receive
• Any long-range financial strategies that you are planning that would impact your funding request
When you are outlining your current and future funding requirements, ensure you include the amount you want now and the amount you want in the future, the time period that each request will cover, the type of funding you would like to have (e.g., equity, debt), and the terms that you would like to have applied.
How will you use your funds? This is very important to a creditor.
• Is the funding requested for capital expenditures (spending that creates future benefits, e.g., buying new kitchen equipment for your bakery business so that it can produce twice as many baked goods)?
• Is it for working capital (funding the general operations of your business)?
• Is it for debt retirement (paying off all or part of your business’s debts)?
• Or acquisitions (purchasing new assets)?
Whatever it is, be sure to list it in this section.
Last of all, ensure that you include any strategic information related to your business that may impact your financial situation in the future, such as going public with your company, having a leveraged buyout, being acquired by another company. Explain the method by which you will service your debt, or whether or not you plan to sell your business in the future. Each of these is extremely important to a future creditor, since they will directly affect your ability to repay your loan(s) or influence the use of other funding.
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The FINANCIALS section is Part Eight of your business plan. The financials should be developed after you’ve analyzed the market and set clear, realistic objectives. Only then can you allocate resources efficiently. The following is a list of the critical financial statements to include in your business plan packet:
Historical Financial Data. If you own an established business, you must supply historical data on your company’s performance. Most creditors request data for the last three to five years, depending on the length of time you have been in business.
The historical financial data to include are your company’s income statements (a list of sales, expenses, and profit for a given period), balance sheets (a summary of a business’s financial condition, including assets, liabilities and net worth), and cash flow statements (statements, each for a given period, illustrating cash receipts and cash payments for a business) for each year you have been in business (usually for up to three to five years). Often, creditors are also interested in what collateral (personal assets pledged to secure a business loan) you may have, regardless of the stage of your business.
Prospective Financial Data. All businesses, whether start-up or growing, should supply prospective financial data. Most of the time, creditors will want to see what you expect your company to be able to do over the next five years. Each year’s documents should include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets (money spent to acquire or upgrade physical assets such as buildings and machinery). For the first year, you should supply monthly or quarterly projections. Thereafter, you can stretch it to quarterly and/or yearly projections for years two through five.
Ensure that your projections match your funding requests. Creditors are always on the lookout for inconsistencies. It’s much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed. This way, your reader will not be left guessing.
Finally, include a short analysis of your financial information. Include a ratio and trend analysis (compare the performance of different periods of time in order to highlight your business’s growth) for all of your financial statements (both historical and prospective). Since pictures speak louder than words, you may want to add graphs of your trend analysis, especially if they are positive.
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The APPENDIX, Part Nine, is the final section of your business plan. However, this section should be provided to readers only on an as-needed basis. In other words, it should not be included with the main body of your business plan. Your plan is your communication tool. As such, it will be seen by a lot of people. You will not want everyone to see some of the information in this section. Specific individuals (such as creditors) may want access to this information in order to make lending decisions. Therefore, it is important to keep it separate—yet to have the Appendix within easy reach.
The Appendix should include:
• Credit history (personal and business)
• Résumés of key managers
• Product pictures and other graphics
• Letters of reference
• Details of market studies
• Relevant magazine articles or book references
• Licenses, permits or patents
• Legal documents
• Copies of leases
• Building permits
• Contracts
• List of business consultants, including attorney and accountant
As we noted above, the distribution of your business plan should be controlled. Do ensure that you keep and maintain an accurate distribution record. This will allow you to update and maintain your business plan as needed. Also, ensure that you include a private placement disclaimer with your business plan if you plan to use it to raise capital (funding to run the operations of your business).