Elements/Components of a Business Plan
There are no substitutes for a well-prepared business plan, and there are no short cuts to creating one. Each business plan is unique and must be tailor made because each business is unique. So the plans are not cast in stone: Entrepreneurs may want to make alterations to suit the specifics of their business. The elements of a business plan may be standard, but how entrepreneurs tell their story should be unique and reflect their personal excitement about the new venture. Although building a business plan doesn’t guarantee success, it does raise an entrepreneur’s chance of succeeding in business.
A business plan typically ranges from 25 to 55 pages in length. Shorter plans typically are too sketchy to be of any value and those much longer than this run the risk of never getting used or read. However, entrepreneurs must recognize that, like every business venture, very business plan is unique. An entrepreneur should view the following elements as a starting point for building a plan and should modify them as needed to better tell the story of his/her new venture. Creating a business plan as one of the business requirements will help the entrepreneurs focus on the specific steps required to build the business and achieve short-term and long-term objectives.
1. Cover Page
The cover of the document is often the ‘’ First Impression’’ of a business for any interested parties or investors. The purpose of a cover is to tell the reader (bankers, investor, or other stakeholder) what the document is about. The cover page should say the words ‘’business plan,’’ and should include:
- Business name
- Company logo
- Telephone number
- Fax number
- E-mail address
- The founder’s/chief executive’s name
- Other contact information
The cover should be attractive and professional looking. Fonts used should be easily read, and color contrasts should be pleasant to the eye.
2. The Table of Contents
This should include a logical listing of all the business plan’s sections, together with sections and page numbers. Be sure to list headings for the major sections as well as for important subsections.
3. The Executive Summary
To summarize the presentation to each potential financial institution or investor, the entrepreneur should write an executive summary. This is the single most important section of the business plan. That is because most readers – especially lenders and investors – turn to it first and decide whether to take the rest of the plan seriously. It should be concise and should summarize all of the relevant points of the proposed deal. The executive summary presents the essence of the plan in an encapsulated form, i.e. it is the business plan in miniature. It should explain the purpose of the financial request, the birr amount requested, how the funds will be used, and how (and when) any loan will be repaid. It should be logical, clear, interesting- and exciting. The executive summary is designed to capture the reader’s attention and imaginations, enticing them to read more and conveying the flavor of the rest of the plan. When readers finish the executive summary, they should have a good sense of what you are trying to do in your business.
The executive summary should be no longer than two type written pages. Capturing an entire business plan within two pages sounds like a difficult task. It is better entrepreneurs begin the process of putting together their business plans by writing a draft of the executive summary, then putting together the full plan, and finally revising the executive summary when everything else has been completed.
4. Business Description
In this section entrepreneurs provide a detailed description of their business. An excellent question to ask yourself is: “what business am I in?” in answering this question include your products, market and services as well as thorough description of what makes your business unique. Remember, however, that as you develop your business plan, you have to modify or revise your initial questions.
The business description section is divided in to three primary sections. Section 1 actually describes your business, section 2 the product or service you will be offering and section 3 the location of your business, and why this location is desirable?
Business Description: When describing your business, generally you should explain:
- Legalities–business forms: proprietorship, partnership, and corporation. The licenses or permits you will need.
- Business types: merchandising, manufacturing, or service.
- What your product or service is,
- Is it a new independent business, a takeover, an expansion, a franchise?
- Why your business will be profitable? What are the growth opportunities? Will franchising impact on growth opportunities?
- When your business will be open (day, hour)?
- What you have learned about your kind of business from outside sources (trade suppliers, bankers, other franchise owners, publications).
In the description of the business, describe the unique aspects and how they appeal to consumers. Emphasize any special feature that you feel will appeal to customers and explain how and why these features are appealing. The description of your business should clearly identify goals and objectives and it should clarify why you are, or why you want to be, in business.
Product/Service: The business owner should describe the company’s overall product line, giving an overview of how customers use its goods or services. Drawings, diagrams, and illustrations, may be required if the product is highly technical. It is best to write product and service descriptions so that laypeople can understand them. The entrepreneur should include a summary of any patent, trademarks, or copyrights protecting the product or service from infringement by competitors. Finally, the owners should honestly compare the company’s product or service with those of competitors, citing specific advantages or improvements that make his goods or services unique and indicating plans for creating the next generation of goods and services that will evolve from the present product line. Try to describe the benefits of your goods or services from your customer’s perspective. Successful business owners know or at least have an idea of what their customers want or expect from them. This type of anticipation can be helpful in building customer satisfaction and loyalty. And, it certainly is good strategy for beating the competition or retaining your competitiveness.
- Describe What you are selling
- How your product or service will benefit the customer
- Which product/service is in demand?
- What is the different about the product or service your business is offering
The Location: The location of your business can play a decisive role in its success or failure. Your location should be built around your customers, it should be accessible and it should provide a sense of security. Most authorities on small business would quickly agree that failing to do your homework in searching for the best location is a serious mistake. Too many entrepreneurs never look for a location beyond their own home cities or towns. When entrepreneurs stay in this “comfort zone,” they often fail to discover locations that would be far superior and contribute significantly to the success of their own venture. Consider these questions when addressing this section of your business plan:
- What are your location needs
- What kind of space will you need
- What is the desirable? The building desirable?
- It is easily accessible? Is street lighting adequate?
- Are markets shift or demographic shifts occurring?
5. The Marketing Plan
Marketing plays a vital role in successful business ventures; hence it should be the crucial concern of entrepreneurs. Every entrepreneur must, therefore, describe the company’s target market and its characteristics. Defining the target market and its potential is one of the most important and most difficult parts of building a business plan. Building a successful business depends on an entrepreneur’s ability to attract real customers who are willing and able to spend real money to buy its products or services. Perhaps the worst marketing error an entrepreneur can commit is failing to define his target market and trying to make his business “everything to everybody.” The key element of a successful marketing is to know your customers their likes, dislikes, expectations. By identifying these factors, you can develop a marketing strategy that will allow you to arouse and fulfill their needs. Identify your customers by age, sex, income/educational level and residence. At first, target only those customers who are more likely to purchase your product or service. As your customer base expands, you may need to consider modifying the market plan to include other customers.
Your marketing plan should be included in your business plan and contain answers to the questions outlined below.
- Who are my target customers (age, sex, income level, and other demographic characteristics)?
- Where do they live, work, and shop?
- How many potential customers are in my company’s trading area?
- Why do they buy? What needs and wants drive their purchase decisions?
- What can my business do to meet those needs and wants better than my competitors?
- Knowing my customer’s needs, wants, and habits, what should be the basis for differentiating in their minds?
Successful entrepreneurs know that a solid understanding of their target markets is the first step in building an effective market strategy. Indeed, every other aspects of marketing depend on having a clear picture of the customers and their unique needs and wants. The marketing plan comprises the following:
Competition: Competition is a way of life. We compete for jobs, promotions, scholarships to institutes of higher learning, in sports and in almost every aspect of our life. An entrepreneur should discuss the new venture’s competition. Failing to assess competitors realistically makes entrepreneurs appear to be poorly prepared, naÃ¯ve, or dishonest. Gathering information on competitors’ market shares, products, and strategies is usually not difficult. Trade associations, customers, industry journals, marketing representatives, and sales literature are valuable sources of data. This section of the business plan should focus on demonstrating that entrepreneur’s business has an advantage over its competitors.
- Questions like these can help you:
- Who are the company’s key competitors?
- What are their strengths and weaknesses?
- What are their strategies?
- What image do they have in the marketplace?
- How successful are they?
- What distinguishes the entrepreneur’s product or service from others already on the market, and how will these differences produce a competitive edge?
This section of the business plan should demonstrate that a firm’s strategies are clearly customer focused.
Pricing: Your pricing strategy is another marketing technique you can use to improve your overall competitiveness. What does the product or service cost to produce or deliver? What is the company’s overall pricing strategy? What image is the company trying to create in the market? Will the planned price support the company’s strategy and desired image? Can it produce a profit? How does the planned price compare to those of similar products or services? Are customers willing to pay it? What price tiers exist in the market? How sensitive are customers to price changes? Will the business sell to customers on credit?
Advertising: Advertising is any sales presentation that is non personal in nature and is paid for by an identified sponsor. Once an entrepreneur defines his company’s target market, he can design a promotion and advertising campaign to reach those customers most effectively and efficient. How you advertise and promote your goods and services may make or break your business. Having a good product or service and not advertising and promoting, like not having a business at all. Many business owners operate under the mistaken concept that the business will promote itself, and channel money that should be used for advertising and promotion to other areas of the business. Advertising and promotions, however, is the lifeline of a business and should be treated as such. Develop short, descriptive copy (text material) that clearly identifies your goods or services, its location and price. Use catchy phrases to arouse the interest of your readers, listeners or viewers. Questions that might be raised in this section include:
- Which media are the most effective in reaching the target market?
- How will they be used?
- How much will the promotional campaign cost?
- How can the company benefit from publicity?
6. Manufacturing Plan
This section is only necessary, of course, if your company is making a product. It should discuss your supply sources, equipment, capacity, and quality control. If you are subcontracting certain components or processes, the subcontractors’ capacities should be discussed. Can the subcontractors deliver on time? This section should also provide information about manufacturing costs.
7. The Management Plan
Managing a business requires more than just the desire to be your own boss. It demands dedication, persistence, and the ability to manage both employees and finances. Your management plan, along with your marketing and financial management plans, sets the foundations for and facilitates the success of your business. Like plants and equipment, people are resources they are the most valuable assets a business has. It is imperative that you know what skills you posses and those you lack since you will have to hire personnel to supply skills that you lack. Additionally, it is imperative that you know how to manage and treat your employees. Make them a part of team. Keep of them informed of, and get their feedback regarding changes. Employees oftentimes have excellent ideas that can lead to new market areas, innovations to existing products or services or new product lines or services which can improve your overall competitiveness. This section should include: your company’s organizational structure; details about the ownership of your company; profiles of your management team; and the qualification of the board of directors.
Your management plan should answer questions such as:
- How does your background/business experience help you in this business?
- What are your weaknesses and how can you compensate from them?
- Who will be on the management team?
- What are their strength/weaknesses?
- What are their duties?
- Are these duties clearly defined?
- What are your current personnel needs?
- What are your plans for hiring and training personnel?
- What salaries, benefits, vacations, and holidays will you offer?
8. Financial Management Plan
Sound financial management is one of the best ways for your business to remain profitable and solvent. How well you manage the finances of your business venture. Each year thousands of potentially successful businesses fail because of poor financial management. The business plan needs to provide as clear and precise a picture possible of your company’s financial condition. You provide that picture primarily through a presentation of three types of financial statements: cash flow, income statement, and balance sheet. Your business plan should discuss the most important revelations and issues raised by financial statements, such as when your business will reach break-even, when it is expected to become profitable, and what the most significant expenses are. Based on the statements, this section should also say something about the company’s financial requirements over the coming five years; if you should state how much you need and the form in which you prefer it (loan, sale of stock, combination of debt and equity, etc.). These statements should go back as long as you have been in business (up to five years) and, in the case of the cash flow and income statements, should also project three to five years when I don’t know what tomorrow brings? You can’t do it with any precision, but you must try any way. If your company has an operating history, you should be able to use your past performance as guidance in looking ahead. Here is some detail about the three types of financial statements:
Cash flow statement: Cash flow is the difference between the movements of money in and out of your business over a certain period-typically measured on a monthly or quarterly basis. Too often, cash flow is confused with sales and profits. Yet it is not an uncommon occurrence for a small company to make a significant sale or operating on a profitable basis and go broke because of insufficient cash flow. A cash flow statement shows readers of the business plan how much money will be needed, when it will be needed, and where the money will come from. In general terms, the cash flow statement looks at cash and sources of revenue minus expenses and capital requirements to derive a net cash flow figure. This is done with respect to a given time frame. Initial cash flow statements should reflect the time frames of operation, whether weekly, monthly, or quarterly. The time frame selected most often corresponds to a natural period of the businesses cycle.
For the purpose of your business plan, you should track cash flow historically and on a monthly basis for the first year and quarterly for the next two to four years. The cash flow statement helps show when and under what circumstances the break-even point will be reached.
Income statement: Sometimes called the profit-and-loss statement. The income statement reports the results of your business from an accounting point of view over the specific period of time, typically quarterly or yearly. In addition to being considered essential information by lenders and investors, it is used to calculate income taxes and should be prepared by your accountant. The income statement asks, did we make any money, not in terms of cash but in terms of proper accounting rules? It reports net sales, less costs and expenses to arrive at income or loss before taxes. Generally, sales and expenses are recorded when they occur, not when the cash is actually received or paid out. Therefore, in an income statement, revenue from sales is not the same as revenue from sales in cash flow statement. The income statement is where a planner makes a case for the business potential to generate cash. This document is where the writer records revenue, expenses, capital, and cost of goods. The outcome of the combination of these elements demonstrates how much money a business made or will make, or lost or will lose, during the year. An income statement and a cash flow statement differ in that an income statement does not include details of when revenue was collected or expenses paid. Accrual accounting and cash basis accounting methods will influence the “bottom line” shown.
An income statement projected for a business plan should be broken out by month the first year. The second year can be broken down quarterly, and annually for each year after. Analyze the results of the income statement briefly and include this analysis in the business plan. If the business already exists, include income statements for up to five previous years. As with all financial documents, having the income statement prepared or at least reviewed by a reputable accountant is money well spent. Any exceptional data should be explained.
Balance sheet: While not particularly useful for start-up business, a balance sheet is required by most lenders and some investors. The balance sheet is a status report. It states the company’s financial condition at a specific time, generally year-end.
Unlike other financial statements a balance sheet is created only once a year to calculate the net worth of a business. If your business plan is for a start-up business, you will need to include a personal balance sheet summarizing your personal assets and liabilities. A new business almost always requires the strength of personal financial commitments. Proving that the entrepreneur can keep commitments is important. If the business exists already, include several of the past years balance sheets. Analyze the results of the balance sheet briefly and include this analysis in the business plan. As with all financial documents, have the balance sheet prepared or at least reviewed by a reputable accountant. Decisions about assets and whether they should be classified as owner debt equity or capital investment will greatly influence the perceived strength of the balance sheet
Because your business plan should be as concise as possible, there may be certain material you want a reader to be aware of that doesn’t fit into the body of the plan. The appendix is where related documents and support materials are included. This section should be provided to readers on an as-needed basis. In other words, it should not be included with the main body of your business plan. Your business plan is your communication tool. As such, it will be seen by a lot of people. Some of the information in the business section you will not want everyone to see. However, specific individuals (such as creditors) may want access to this information in order to make lending decisions. Therefore, it is important to have the appendix within easy reach.
The appendix would include:
- Credit history (personal & business)
- Resumes of key managers
- Product pictures
- Letters of reference
- Details of market studies
- Relevant magazine articles or book references
- Licenses, permits, or patents
- Legal documents
- Copies of leases
- Building permits
- List of business consultants, including attorney and accountant
Any copies of your business plan should be controlled. Keep a distribution record of who has a copy of your plan. This will allow you to update and maintain your business plan on an as needed basis. Remember, too, that you should include a private placement disclaimer with your business plan if you plan to use it to raise capital.
- Create Your Business Plan (Sba.gov)
- Writing a Business Plan (The Start Up Donut)
- Writing your business plan (Canada Business Network)
- How to write a business plan (Business.gov.au)