- Before getting down to work, take a close look at the four principles to guide you through the challenge
- Six chapters to include into your business plan
- Milestones and indicators
- Team and company
- Financial plan
Your business plan is a full-fledged strategy, where you look into how you’re going to implement your commercial project. Whether you need to raise some money for your new venture or scale up your existing company, you need a dazzling business plan to make a favorable impression on your potential investors and gain their trust. Drawing up such a massive document sounds easier said than done. What information do I include into my plan? How do I present the information in the best way possible? In this 101 tutorial, I’ll go through the principal chapters of a business plan. Don’t be afraid of the challenging task lying ahead of you! With hard work and dedication, you’ll eventually get to your destination.
Before getting down to work, take a close look at the four principles to guide you through the challenge.
1. Be concise.
Make sure your business plan only contains the essential information, without any digressions or irrelevant remarks. Here is why brevity is so important:
- Your potential readers must not feel scared by just looking at your business plan. Who would want to spend hours plowing through a 65-page document (especially the one with multiple tables and diagrams)?
- A tricky thing about a business plan is that the work writing it is never done. Moving forward with your business, you’ll have to make systematic adjustments to your document. The problem with a bulky business plan is that it’s hard to work with. Conversely, a lightweight, well-structured plan is like a reference book, where you can easily find any information you need.
2. Find out who your audience is.
When writing a business plan, think about your potential readers, their needs and abilities. You shouldn’t expect an investor to understand sophisticated medical terms or two-line chemical formulas. Describe your product so that anyone can capture the essence. This may be grueling, especially if you’re not used to adjusting your vocabulary for non-professionals to understand. If you feel the need to zoom on into certain facets of your idea, provide supplemental statistics and visuals in appendices (this is what they’re for, after all).
3. Keep your head high.
As surprising as it may sound, most entrepreneurs have no MBAs or degrees in economics. Having no professional competences, they have to learn to run a business along the way. Launching a business without any expertise takes some courage, don’t you agree? However, if you’re truly passionate about your project, you’ll have no trouble creating a business plan and keeping it up-to-date. And vice versa. If you lack faith in your venture, your stellar business competences will be useless.
And one more thing. Begin with a blueprint of your plan (2-3 pages) just to get the general idea of where to go. Once you’ve felt the ground under your feet, you can start to expand your mini-strategy by adding more details to it. By taking the process slowly, you’ll be less intimidated by the task.
4. Do some research.
Before you make a start, it might want to look at a couple of business plans created specifically for your industry (restaurant, beauty salon, online store, etc.). Take a note of what structure the documents have, what language their authors use, how different metrics are calculated, etc. There is nothing wrong about getting a hint of how things should be done, especially if you’re not one of those lucky people who have a business-savvy friend or colleague. Click here to discover some fine examples of finished plans. You can find more templates by googling “coffee shop business plan”, “pharmacy business plan”, etc.
Six chapters to include into your business plan
Now that we’ve outlined the main rules for creating a coherent business plan, let’s take a close look at its contents. This is what we’ll be focusing on in the rest of the article. At the end of the text, I’ll provide a few helpful links that will complement this tutorial just fine.
Most of us associate documents (and paperwork in general) with something boring and purely theoretical that has little to do with reality. I consider it my duty to debunk this myth, or it may become a serious obstacle on your way to an effective plan. A coherent business plan is a powerful asset that can help you get a strong start on the business scene and make the most of your talents. It’s an adjustable strategy that needs to be updated and re-envisioned from time to time. As you’re understanding your clients’ behavior and revealing flaws in your forecasts, you’ll be making adjustments to certain chapters of your business plan. Your main document must always be handy, helping you monitor your achievements, revision your branding, and correct your course.
Your business plan must open with a brief description of what your project is about. Don’t overdo it: two pages will be more than enough to pitch your idea. Sometimes, a summary is placed at the very end of your work.
In this chapter, you must prove that there is an unmet demand for a certain service or product, i.e. an opportunity for you to monetize your expertise. Plus, this is where you must sketch out your fiuture clients and rivals.
How are you going to benefit from the existing opportunity and fill the gap in supply? How are you going to get noticed among all other vying proposals? How do you know whether your business concept is a hit or a flop? This part of your document is of paramount importance, so make sure you nail it.
4. Team and company
You might’ve never thought about it but ideas are not the only thing business angels are hunting for. Sometimes, a strong, competent team is worth a dozen smart ideas. Do your best to present your co-workers in the best light possible. Talk about the specialists you have on your team and their best qualities, both personal and professional. What other talents do you need to complement your squad? If you’re not a newcomer in the niche, take a few lines to talk about how you (and, maybe, your partners) have established and grown your firm.
5. Financial plan
A financial plan includes a series of forecasts regarding your company’s expenses and profits, as wells as the amount of cash received and paid out by your business. It’s not an exaggeration to say that this chapter is the backbone of your entire document as it tells your potential investors whether it’s sensible to invest into your idea.
Appendices contain detailed descriptions, graphs, and illustrations that haven’t made it to the core part of the document. If your readers need to know more about a certain aspect of your business, they’ll find appendices extremely useful.
But now let’s examine each chapter up-close. To make a good overall impression, each chapter of your plan must perform its specific functions and not overlap with other parts of your document. Otherwise, your plan will appear inconsistent and, therefore, compromise your efforts.
When reading your summary, potential investors make the first acquaintance with your firm. Tell your readers who you are, what kind of help (financial or otherwise) you want to get from them and why your project is a worthy candidate for their support. Don’t beat around the bush. Be straightforward. Here is a trick that can save you lots of time. Start with the “Opportunities” chapter and save the summary for dessert, when you have the entire plan in front of you. Why? Once you’ve worked through all chapters of your plan, you’ll be able to create a more consistent and structured summary. It’s safe to say that your summary is a standalone document that brings out the cornerstone issues of your business plan. For a seasoned investor, running through your summary will be enough to see whether your project is worth pursuing. If your summary manages to spur your readers’ interest, they’ll ask you for more information, which means that you’ll be one step closer to your goal! This leads us to the idea that your summary serves as a catalyst for your entire venture. At the same time, you must remember that a summary must be a succinct extract of your business plan. If you find yourself writing the third page, go back and trim some of the passages.
When writing a summary, stick to the structure below.
Give a succinct description of your project.
Open your summary with defining your idea or company in one sentence. This is one of those tasks that sounds a piece of cake but ends up taking hours. Using your slogan is a way to go but only if it’s descriptive, i.e. and makes it clear what industry you’re in.
If the market fails to provide a product or service the customers need, there is a gap between the demand and the supply. Every company tries to carve out a niche in the market and fill this gap. Provide insight into the problem you’re addressing. What makes you think that this problem hasn’t already been solved by other companies, in one way or another?
Your services or goods are a possible answer to the problem. How are you going to cater to the existing need?
Zoom into your average customer. How old are they? What is their occupation? What are their key values? As a next step, evaluate the size of your target market. How many consumers are ready to part with their hard-earned money to purchase your product? Don’t take guesses. Conduct a market research to be able to make more or less precise estimations. Unless you want to misinform your readers, you should get one thing clear. If you’re manufacturing an arthritis cream, this doesn’t mean that your efforts are directed at all people because everyone runs a risk of having muscle aches. Instead, you must focus on certain categories of customers, such as athletes or senior people. The more precise you are, the easier it will be to develop the suitable marketing strategy aimed at a specific group of customers.
How is your target audience getting by without the product they need? Do they have access to substitute goods? How is your product better than what’s being offered? Take ample time to study your potential competitors, including indirect ones.
Talk about the people on your team, who’re as committed to your project as you’re. As I’ve already said, a team is the main component whose importance is often overlooked. Without a devoted group of like-minded people, your business idea, however promising, will inevitably fail. List the strong sides of your partners and employees. Talk about what stands behind their interest in the venture. Make your readers believe in your team as much as you do.
Cite the essential extracts from your “Financial Plan” chapter, including your expected sales, costs, and profitability. Strings of numbers may look confusing, so think about how to visualize your financial information for easier perception. Use diagrams and graphs.
Getting the funding for a project is the most common reason behind writing business plans. If this is true for you as well, use this section to identify your needs. What amount of capital do you need and when? How did you come up with this amount? There’s no point talking about the investment period this early into the project. If your idea gets the green light, you’ll have enough opportunities to negotiate this issue with your investor(s).
Milestones and progress
Don’t be shy to update your investors on what you’ve already achieved. If, for example, you’ve already got people hyped up for your product, be sure to mention this fact to your readers. Show that you haven’t been just sitting there waiting for the money to land into your hands! In addition, outline the main goals you’re planning to reach throughout the next 1-3 years.
There is a significant difference between preparing a business plan for your teammates and outsiders. If you’re creating a guide for the internal use by your teammates, feel free to leave out some of the sections or exclude the summary completely. An in-house plan has a flexible structure, so don’t hesitate to prioritize the things that matter to your employees the most.
If you choose to write your summary last, this chapter will be the beginning of your journey. Talk about the existing problem. How have you discovered that the market is lacking a certain product? Who will be potentially interested in your offer? How does your product fit into the existing market environment? Does your solution have an edge over other companies’ solutions? Are you planning to upscale your model and compete with bigger players?
For the most part, readers approach this chapter prepared as the summary has already put them into the picture. Nonetheless, you still need to amplify on some of the issues you haven’t addressed in your summary.
Problem and solution
Talk about the unsatisfied demand that you think exists in the market. Is there something customers would like to have that the market can’t offer yet? How are they currently handling the deficit? What’s wrong with the existing substitutes? Are they too costly or do they lack the necessary qualities?
What can you do to change the current situation to the better? The answer to this question constitutes the core of your business plan. Therefore, the way you present this information will affect whether you’ll get the green light from your investors. It’s totally fair, if you ask me. If you fail to define the current problem, you’ll hardly be able to build a business strategy viable enough to pick your investors’ interest. To convince your investors that you can meet your customers’ needs, you must believe it yourself. Get in touch with real people with real needs. Ask them whether the problem (that you assume exists) causes them inconvenience. If you’ve heard plenty of positive answers, congratulations! This means that your solutions stands a chance of stepping into the scene. Pitch your idea to the consumers and ask their opinion. Do they approve of your proposal? Listen to their suggestions. Face the criticism, if any. Knowing the existing problem first-hand, your potential clients might have a couple of smart improvements on your solution. Once you’ve done enough field research, you can proceed to putting your solution into words. What does your product look like and what functions does it perform? How will it improve the quality of your clients’ life? What selling techniques are you going to apply? You can take it a step further by providing a few examples of how people can benefit from your product or service in real life.
Now you can focus on the market segment you’re targeting, i.e. people you’re hoping to sell your product to. How deep you go into this issue depends on the type of your business plan. Nonetheless, you must know who your potential clients are and how many of them are really interested in your product. If their number is small, investors may question the rationality of supporting your project. Before doing a full-scale market research, do some preparation work. Define one or several target segments, i.e. people that can make a good use of your product or service.
As I’ve already mentioned, avoid the mistake of confusing the entire pool of customers for your target segment. Let’s say, you’re selling jackets. While jackets are worn by all demographics, you must single out one or two categories of consumers (office clerks, schoolchildren, young women that follow fashion trends, etc.).
Here is a scheme to help you determine the boundaries of your target niche by moving from top to bottom:
- your available market includes all customers you’d like to offer your product to;
- your segmented market is a part of your available market you’re going to target;
- your market share is a part of your segment market you’re going to sell your product to in the next couple of years.
Now describe the situation on each market. What trends are defining it? Is the market growing or shrinking? How will it be changing in the future?
Now you can zoom in on the generic image of your potential customer, including their gender, age, income, occupation, behavior, hobbies, habits, etc. Don’t put this work aside as it will pay itself off when you’re developing a marketing strategy to bring together your product and your audience.
If your customer base includes several heavy-weight companies that order big and keep your business afloat, you might want to provide more information about them. What businesses are your major clients involved in? Why have they chosen you as their supplier? In what way does their demand define the supply in your market? If, however, your customers are mostly individuals that buy little quantities of your product, you can skip this section.
Once you’ve finished describing your target audience, focus on the businesses you’ll be sharing the scene with. What other companies or entrepreneurs are trying to solve the same problem as you’re? Why do you think customers will prefer your product over what your competitors are offering?
If you’ve browsed through a couple of business plans, you might’ve seen that this kind of information is often presented in the form of a “competition matrix.” Basically, this is a table where your product is compared with its alternatives. In the first vertical column, list the names of your main rivals. In the top horizontal line, list the comparison criteria (price, quality, convenience, etc.). If a rival’s solution meets a certain criterion, mark the cell where the respective column and line cross. What you want to do here is to showcase that your solution outstrips other offers (or is, at least, different). A competition matrix is a smart way to visualize your competitive advantages.
Don’t repeat the mistake made by novice entrepreneurs by saying that your product is one-of-a-kind and you have no competitors. You just haven’t looked properly! There is direct and indirect competition. Your direct competitors create products and services that are very similar (or even identical) to your own. Indirect competitors offer a totally different way of solving the same problem you’re addressing. While harder to detect, indirect competitors must not be underestimated. They can have a huge influence on the success of your venture. In the early 20th century, the legendary Ford plant had no car makers to compete with. However, Ford’s newly designed vehicle had to oppose the traditional means of transportation, such as horses, bikes, and more. The automotive pioneer had to convince customers that his invention was better than everything they’d used before.
Future products and services
Share your plans for the future with your investors to give them the idea of where you want to take your business. Are you planning to widen your lineup? What other fields of business would you like to get involved with? What makes you think that you can handle the challenges of expansion?
Although making long-term plans is a good thing, try not to get carried away. Avoid going into too much detail and getting your potential investors’ hopes too high. You can never know for sure what the future holds, especially you haven’t even launched your project yet.
Now you must talk about how exactly you’re going to bring your business idea into life. This chapter usually covers such aspects, as promotional events, sales strategy, daily operation, milestones, criteria of success, and more.
Marketing and sales
These two major strategies cover a wide spectrum of issues by answering the following questions: What techniques and practices are you going to use to market your product? Are you going to test any unique promotion tools your competitors don’t have? Which part of the market are you going to target? What factors will be affecting your prices? Before getting down to these major documents, make sure you’ve pinpointed your target segments and ideal customer. You can’t come up with a savvy marketing plan unless you know exactly who you’ll selling your product to.
Pay special attention to how you’re going to present your product or service in the market. Positioning is all about the image of your company and its products in the eyes of customers (in the first place) and other market players. Is your product meant for people with a high level of income or those leading a modest life style? Do you offer a unique solution or an easily replaceable one? You must know exactly who you are.
A positioning strategy relies on a solid knowledge of the current market situation. Here are the questions to help you figure out your place in your market niche. Does your solution have any qualities or characteristics that can’t be found anywhere else? What factors affect your potential customer’s buying decisions? Why do you think customers will choose your product over other propositions? How do your rivals position themselves? What positioning ideas can you borrow from them and adjust to your business model?
Your selected positioning strategy is closely linked to your pricing model. In fact, it’s a major factor that affects how high the price for your product/service will go. By looking at your price, people will be able to figure out whether you’re being offered a premium or mass market product.
Determining your final price is a tough process that requires full concentration and precise calculation. Your business plan is no place for random numbers taken out of your head. Every number must be accounted for. You only have one chance to set a price, so make sure you do it right the first time. Adjusting your price soon after launching your product will be both costly and unprofessional. Every value proposal is one of a kind. However, here are a few rules of thumb every producer must follow religiously:
- Your price must fully cover your production costs and bring you some extra money (a profit). In other words, you must charge for your product more than you’ve spent producing it.
- Your price must not necessarily account for the biggest part of your income. You can charge for servicing a product more that you charge for the product itself. This rule only works for a limited range of products, usually those designed for long-term use (gadgets, electronic appliances, etc.)
- When setting your price, be sure to study the current market situation, including the sizes of demand and supply, growth/decline trends, customer expectations, etc. Your pricing policy must go in line with the market situation.
Here are three major pricing models:
- When using the “cost plus” approach, you set your price at the level that exceeds your initial costs. This practice is commonly used by production companies.
- Market pricing is a totally different approach to pricing, whereby your price depends on the financial possibilities of your targeted market segment.
- If you’re using a value-based pricing model, you determine your price based on the amount of value you’re offering your customers. For example, you’re cleaning houses and save your customers 1 hour a week. If 1 hour of their work costs 40 dollars, you can charge for your work, say, 25 dollars.
After scrutinizing positioning and pricing, it’s time to move on to promotion. In your promotion strategy, you talk about how you’re planning to push your product in the market, draw your customers’ attention and win their loyalty, react to your customers’ feedback, and more. Make sure you put much thought into developing an elaborate, detailed plan. In the long run, an ineffective strategy will blow a huge hole in your budget. You don’t want to make your investors’ money fly, do you?
A full-fledged promotion strategy must cover the following issues.
Who doesn’t like beautiful things in a neat packaging? The appearance of your product is a tremendous factor in your customers’ buying decisions. Your packaging must be on-theme with your value proposition and make your product stand out. Imagine that your product is standing on the shelf in a supermarket. How do you catch your customers’ attention by only using visual methods?
Talk about what types of advertising you’re going to exploit. Are you determined to tap into the opportunities of online advertising or is it mainly the traditional platforms (newspapers, radio, etc.) that you trust? Furthermore, you must tell your investors what tools and metrics you’re going to use to measure the effectiveness of your ad campaign.
If you want to reach out to as many people as possible, there is hardly a better way to do this than putting your product to the mass media spotlight? A good, detailed product review in a popular newspaper or magazine, both online or offline, is worth a thousand ads! Upon learning about your offer from a trusted source, people will be curious to try out your product. By using smart PR techniques and the power of storytelling, you can enhance your visibility, build robust relationships with the public, and create a strong reputation for your project.
Content marketing is all about providing your customers with useful information related to your service or product. For example, if you’re selling furniture, you can post articles about interior design, effective cleaning means, custom furniture expos, and more. By publishing such materials, you’re showing that you’re interested in what’s going on in their industry and updated on the latest trends.
Nowadays, social media are, without any doubt, the moving force behind any promotional campaign. For an increasing number of customers, the social media have become the key source of information about new products, special offers, and market tendencies. This by no means is a signal for you to register with every social media platform out there. You simply won’t have the time to manage and update a big number of pages! Therefore, you should only establish your online presence on the social media used by your target audience.
Sometimes, to create and market a product, several companies need to join their expertise, skills, and resources. For example, your partner holds a patent for a unique component that you need to manufacture your electronic device or uses clever advertising practices that can skyrocket your sales. If you have signed partnership agreements (or are planning to do so), be sure to address this issue in your business plan.
This section may include logistics schemes, order execution, customer service, paperwork, and other day-to-day tasks that are crucial to your business performance.
Suppliers and delivery
If you’re involved in re-selling products manufactured by other firms, you must give a detailed description of the entire process. What suppliers are your working with? How are the products delivered to you and how do you get those to the end customer? Make a quick overview of business relationships with foreign suppliers: working with international firms can be vastly different from dealing with domestic companies.
If you’re a tech-based company, you must look at the technologies behind your manufacturing process. What solutions and tools enable you to create a better product in a more efficient way? Keep in mind that you’re not under the pressure to share your trade secrets or reveal sensitive information. Your task is to provide a high-level overview of your technology and explain why it overrides other similar solutions. If your readers want you to expand on the topic, you can provide extra information in an appendix or separate document. However, first you need to decide for yourself how much you’re ready to reveal. If you’re not sure about some information, it’s better to keep a lid on it.
Distribution is all about how your product comes into your customers’ hands. Each market niche uses its own distribution practices and models, and yours is not an exception. Focus on describing the procedure you’re following to deliver your product to the end customer. What works for you might not work for other businesses in your niche, so take the time to touch upon the distribution patterns of your competitors.
Below I’ve pinpointed the most popular distribution models.
What can be more simple and straightforward than selling your products directly to your customers? No platforms, agents or other intermediaries. Just two parties making a deal. Because you don’t have to pay a commission to an intermediary, you can afford to set a lower price, which is something your buyers will appreciate. The toughest thing about this model is to figure out how to minimize the costs of delivering your products from the warehouse facilities to your buyers. Apart from that, the direct sales model is ideal for a small startup business.
If you’re running a large retail company, you can’t possibly manage contacts with all your suppliers, whose number can reach several hundreds and even more. Dealing with it yourself would put a great pressure on your business, both money- and time-wise. The way out is to purchase product consignments from large distributors that use their own supplier database. As a fee for their services, you’ll have to share your sales income with your distributor.
Representatives of manufacturing companies
For the most part, such representatives are individual sellers involved in marketing your product via different distribution channels in exchange for a commission. The best thing about this model is that the reps have established links with retailers, sparing you the necessity to make contacts yourself.
Producer of machinery/equipment
If you’re a manufacturing company, you can supply your spare parts or mechanisms to other businesses that use them in their end products. This distribution model is very common for the automotive industry. For major automobile corporations, procuring spare parts for their vehicles from other manufacturers is cheaper than producing them.
Keep in mind that you don’t have to only choose one distribution model and stick to it. You can make a combination of two (or even more) distribution patterns that fit your business. Tailoring common practices to your needs is a great ability you’ll need every step of the way.
Milestones and indicators
Sharing your plans for the future is the best way to breath life into your business plan and make it a viable, persuasive document. Show your potential investors that you know in which direction your company is headed. Sketch out the milestones you’re planning to hit in the next 1-3 years. Make sure you set feasible goals, i.e. you have enough expertise and resources to achieve them. If, for example, you manufacture table lamps, your milestones may include logo development, signing of agreements, product launch, expansion to foreign markets, etc.
While your milestones represent the work that still has to be done, your current progress section describes your first successful steps as an entrepreneur. Your goal is to convince your readers that you can run a successful commercial project that will generate money. Tell your potential investors about how many items of your product you’ve already sold, what agreements you’ve signed, what reviews you’ve got, etc. Seeing that they’re dealing with a promising venture, investors will be more eager to provide you the financing you need.
Indicators of success
Following the milestones and achievements, you must list the main metrics you’ll be using to measure your commercial success. By monitoring such metrics, you’ll be able to detect possible flaws and problems early into project and correct them in a timely manner. If you’re running an online clothing store, you can track the monthly number of orders or the number of newly registered customers.
Making assumptions is an organic part of launching any business venture. For example, by introducing an innovative product, you assume that people really need it and, therefore, are going to spend their money on it. If you’re marketing your product online, you make assumptions regarding your advertising costs, etc. While some assumptions may seem self-evident to you, you still must outline them in your business plan and prove that they are true. This will increase your chances to get the funding.
Team and company
This chapter must tell your readers about your corporate hierarchy and your co-workers. Your potential investors must know what people stand behind your idea and whether they have the expertise and energy to grow a profitable business out of an ambitious idea.
As I’ve already mentioned, investors are mainly attracted by people rather than their ideas. If anything, a business angel would rather fund a second-rate idea managed by a professional team, rather than trust unreliable people with a stellar idea. What makes you believe that you can accomplish everything you’ve planned? Do you have inspired people by your side, who are just as dedicated to your project as you are? Do these people have the necessary competences to do their respective jobs? Do their portfolios include similar projects? Along with answering to these general questions, focus on each member of the team. Talk about each employee’s background, career progress, experience, and advantageous personal traits. In addition, describe the role and functions of each employee within your project.
Don’t overdo it while trying to present your colleagues in the best light possible. Steer clear of positions containing the words “chief” or “director”, such as CCC (Chief Customer Officer), CFO (Chief Financial Officer), etc. Most of the time, employees don’t have enough experience to back up their loud position. The best thing is to start with lower positions to motivate your teammates to grow professionally, explore new horizons, and climb up the career ladder.
It’s vital to understand that it’s OK not to have a ready-to-go team by the time you’re creating your business plan, especially if your project is still in the early stages of development. Perhaps you haven’t found the right people for the jobs, which is totally normal. It’s better to wait for the proper candidate rather than hire a person from the street. By honestly admitting that you’re still searching for certain experts, you show that know your company needs and won’t settle for candidates who can’t meet them. One you’ve handled the staff issues, proceed with the organizational structure of your company. You may include the organizational scheme into one of your appendices. Don’t miss the chance to take a step aside and see your company with the eyes of an outsider. By looking at a smart, well-drawn organizational scheme, you’ll be able to see what other specialists you need to reinforce your team, how to re-arrange the existing teams for better performance, etc.
This is probably the shortest (yet not the easiest!) section of your business plan that addresses the mission, legal form, location, and history of your company. Plus, it must touch on intellectual property rights. If you’re writing a business plan for the in-house use, you can leave out this section as your colleagues and partners must already know these fundamentals like the back of their hand.
Avoid the common mistake of describing your mission on several pages. Filter it down to a few sentences that sum up where you’re going with your project and how you’re planning to make the market situation better. In some cases, your value proposition may serve as your mission.
If you’re involved with technologies and science, your main document will be incomplete without this section. List all patents registered to your name, as well as the pending ones. If you’re using a licensed technology owned by another business, linger on the licensing terms. How exactly are you allowed to use this particular technology? When is your license due? If, however, intellectual property is not something you have to deal on a daily basis, feel free to ignore this section.
Take a minute to talk about the legal form you’ve chosen for your firm. Depending on your country of registration, it can be LTD, LLP, GmbH, etc. If you have a partnership, explain how profits and losses are distributed between the partners.
If your business has been operating in the market for some time already, it will be nice to give you readers a glimpse into its background and major goals already achieved. This section can be viewed as a starting point for your entire document. By reading about your company history, your freshly hired employees will be able to learn about the journey you have been through.
Wrap up this section with the current physical location of your business and its storage and production facilities (if any). What capacities do your facilities have? Are you planning to increase them and in what way?
Finally, we’ve come to Financial Plan, which is the last chapter of your document. Scared by the word “financial”, up-and-coming businessmen have a dread of this chapter, thinking that it requires knowing all ins and outs of accounting. This could not be farther from truth, though. The beautiful thing is that you don’t need a PhD in finance to create savvy financial reports. All kinds of helpful instructions (if you need any) can be easily found online. A standard financial plan includes monthly forecasts for the 1st year and yearly forecasts for the next 3 years of operation. Sometimes, investors may wish to take a look at a 5-year forecast, so make sure you have one, just in case. Below are the main blocks of information that make up a solid financial plan.
In this report, you must predict what amount of goods and services you’re going to sell within a certain time period. Be succinct and avoid unnecessary details and explanations. If you’re a production company, you might want to make a break-down by categories, i.e. by target segments or key products. For each category, calculate the cost of goods sold (COGS). The COGS indicator only includes costs of manufacturing a product or rendering a service. It does not include fixed business costs, such as rent payments, personnel costs, etc. If you own a coffee shop, your COGS will be the money you’ve spent on coffee beans, tea, bread for sandwiches, cookies, etc.
Labor costs forecast
In this part of your financial plan, you must look at how much money you’re planning to spend on salaries for your co-workers. If you have a small firm, you can make a full list of your staff, with a monthly salary paid to each employee. For larger businesses, it’s better to provide aggregated salaries by departments, e.g. for customer service department, sales department, etc. In addition, you must calculate the amount of extra costs paid by the employer for each employee. Such costs include contributions to payroll fund, insurance fees, etc.
Profit and loss statement
This document draws a line under your financial performance by answering a vital question: “Is my company making profits or losses?” Luckily, you’ve already done the ground work for your profit and loss statement as it uses some data from your sales forecast and labor costs forecast. The major indicators included into the profit and loss statement are: sales, costs of goods sold, operational costs, operational income, taxes, depreciation and amortization, net income, and some others. In the bottom line, you must deduct your total costs from your total income. This is the moment of truth, when you find out whether your venture is economically viable.
Cash flow statement
I’d like to stress that a profit and loss statement and a cash flow statement are two separate documents that characterize different aspects of your business. While the former shows how much money you earn and spend, the latter reflects how much money is currently at your disposal (both in cash and on your bank accounts).
Still can’t figure out how are the two reports different? To do this, you must differentiate between “cash” and “income.” Say, a customer has ordered a product from you. You’ve delivered the product and sent an invoice to the customer. The client has about 30 days to pay the invoice. Although you don’t get the money at once, you must make a record to your profit and loss statement on the day of sale.
A cash flow statement shows how much money is currently available to you. To this initial amount, you must add the money (incomings) that have been credited to your accounts or paid to you in cash throughout the month. At the same time, you must deduct your expenses (loan payments, taxes, fines, etc.). Therefore, you cash balance is calculated like this: initial amount + incomings – expenses.
Your cash flow statement is a source of useful information to help you make strategic decisions. Having enough money on your accounts means that you can afford to buy advanced machinery for your plant or outsource an international expert. Conversely, a negative balance may be a signal to control your spending more tightly. By looking at your statement, you can determine the size of a loan you need to cover your current debts or expand your business. Make the habit of systematically checking your balance. By doing so, you’ll be able to detect possible money problems and solve them in a timely manner, before things get worse.
Here goes the final stretch! In your balance sheet, you must list the amounts of your assets, liabilities, and equity capital. To find out the net value of your company, you need to deduct your total liabilities from your total assets.
Use of funding
If your objective is to secure funding for your project, you must tell your potential investors how you’re going to spend the money they may give you. There is no need to pin down your expenses to the last dollar. Prioritize the main directions that will need funding the most (promotional campaign, purchase of new machinery, research, etc.).
End your “Financial Plan” chapter with an exit strategy that describes how you’ll leave the market if forced to do so under the circumstances. The range of exit strategies includes a variety of methods and plans. Will you sell your business to a partner? Which of your partners will be attracted by the idea of acquiring your assets? Will you launch an initial public offering? Make sure you have a robust exit strategy so that your potential investors could at least get their money back.
While appendices are not a mandatory part of a business plan, few businessmen miss the opportunity to expand on some of the issues regarding their commercial project. Appendices are a proper place for bulky tables and diagrams, detailed descriptions, lists of terms, drawings, certificates and approvals, legal information, and other materials that don’t fit into your business plan.
Phew! My work here is done! I hope that my tutorial will help you navigate through rough patches while writing your business plan. If you still haven’t got a logo for your company, check out the Logaster service right now! It’s free and easy!