What is a business plan?
A business plan is a description of your future business and a plan for how you intend to grow it to that point.
There are many reasons why you might write a business plan. It is both an exercise in planning in how to achieve success, and a demonstration that you are capable of making the business successful.
Commonly, business plans are prepared when someone asks for one in order to make a decision whose outcome is important for your business. For example, you may be seeking investment, or you may want to borrow money.
Some businesses use them as a tool for communicating high level goals, in the short-term (until the next plan), medium-term and long term. They act as a record of intention against which you can later measure progress and assess why certain goals were met or not.
They are also used before starting a business to investigate whether there is a market for a product or service, whether the team is likely to be successful, and what would be needed for success.
Strategic planning techniques
There are many tools that can be used to analyse a business and find opportunities and weaknesses.
The aim is to understand the business and what needs to happen in order to achieve the desired outcomes. A business plan can combine many of these techniques. Most of them can be used at the highest or lowest levels. You may apply to them to the business, or a production process.
VMOST
VMOST stands for Vision, Mission, Objectives, Strategy, and Tactical. The idea is that you start at Tactical (a bottom-up approach) or Vision (a top-down approach) and move along the line to the other end. In other words, your strategy should be influenced by your objectives or your tactics.
In this way, each of the items connects the next. To move from your vision, you eventually need to know your tactics. From your tactics, you can establish a vision.
PEST
PEST stands for Political, Economic, Social and Technology. It is an analysis of those four factors and helps reveal opportunities and threats that may be outside your control.
SWOT
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It is the most commonly used tool.
Start your analysis by brainstorming with other people and noting every observation or idea. You can develop each point further later - preferably still in a group so that your own personal biases do not lead you to filter out valid thoughts.
SWOT analysis is usually carried out with consideration of your key competitors in your market. However, if you are analysing a team within a business you may look at other teams within the same business.
Your strengths and weaknesses might lie in:
- the skills, knowledge and experience of your team
- access to markets
- ownership of an asset (such as a new piece of machinery that reduces production costs, intellectual property or know-how, or finance)
Your opportunities and threats may be external or internal – they may be PEST factors or consequences of your strengths and weaknesses.
For each strength, weakness, opportunity, or threat, you should further think about the other three in relation to that.
For example, your strength might be your ability to be fast to market because you have a strong product development team. Your weakness may be that in being first to the market, you might need to educate your customers about your product. There may be an opportunity to work with other established retailers, bundling your product with theirs, and therefore educating your future customers and leveraging their customer base. A threat might be that a larger competitor develops a similar product once it sees your success, i.e. that you spend time and effort market, only for a larger competitor to come in when it is clear your idea is a good one.
By writing strengths, weaknesses, opportunities, and threats into a matrix (a box divided into quarters), you should be able to see the risks that each bring and the risks that each mitigate.
For example, a threat that raw material costs of a key product might increase may be offset by your ability to increase the efficiency of production processes. Or the same threat might demonstrate your weakness in reliance on that key product and lead you to conclude that you should diversify your product range.
What should a business plan contain?
There are no rules as to what a business plan should contain or how it should be written.
Depending on why you write one, what information you decide to put in it can be very different to that which someone else might include.
Stakeholders are people who have an interest in the business. They may be owners, but they may also be potential investors, employees, customers, suppliers, lenders, or communities. When writing a business plan, you need to bear in mind constantly which stakeholders you are writing it for.
What is important is that your plan conveys the information that the reader needs. If it is a sales document to convince potential investors to invest, it should give a positive view of the future viability of the business. If it is for the current management team to reassess the direction the business is taking, it may be much more focussed on market position or operations with an analysis of past performance.
Sections in a typical business plan
Executive summary
Many people will not read further than the executive summary unless your business seems to have real merit.
It is therefore one of the most important parts of your business plan.
As a summary, it should give an overview of the rest of the plan without too much repetitive detail.
A good executive summary covers:
a description of your product or service in plain English, one that anybody who is not an expert could understand.
where your business fits in the market and where there are specific opportunities for you to flourish.
who is involved in the business, and why having them on board will give the business an advantage.
the business’ current finances, how much investment you are looking for, what you will spend it on.
headline financial projections and other number-based goals – those that are likely to be most important to the reader. These may include an expected valuation of the business in three years’ time, or a projected return within a similar timeframe. You might include the percentage of the market you hope to have, or the number of customers. You might talk about how many units of your product you will have shipped, or to how many different markets.
may be an expected valuation or a projected return on investment within a timeframe. You may wish to give projections for a number of scenarios to show that you have considered risks fully.
Business description
This section should explain in further detail your business concept.
You should describe your business in enough detail so that the reader would be able to tell someone else what it does.
Your reader might not have any prior knowledge of the product or service, or the industry you operate in. So, while you can use industry terminology, you should explain in plain English what those mean if your reader is not already an expert.
You should describe your unique selling point (USP) – what makes your business different to any other in the market.
Background
This section explains how you have come to be in the position in which you are and why are you continuing to pursue the business.
The background to your business idea is important in showing why you are likely to be able to make the business succeed. Stakeholders are backing not only your business idea but also your ability to make it happen.
Depending on why you are writing a business plan, it may be useful to a reader to explain some history. Bear in mind that you will talk about management team experience and the market opportunity in later sections.
You should explain what action you have taken to date, and whether you have any existing key assets, such as industry contacts, relationships with potential customers, or software that you have already developed.
This should show your determination to make the business happen, and what value there is already within the business.
Management team experience
If knowing who is behind the business is important to the reader, then your plan should set out your experience and that of your management team relative to the business that you are starting.
For example, it will be as important to most investors as to who they are investing in as what they are investing in.
You should show that you have the knowledge and professional qualities to succeed with your business based on your previous track record.
This section is effectively a short curriculum vitae for each member of the management team.
There may be skills or knowledge the management team lacks. If these are obvious, your plan should explain how you will obtain them, for example you may hire contractors for specific short-term projects and employees for the longer term.
If you already have investors, you should also include their details and explain why they contribute your business.
Customer analysis
Knowing who your customers are is important to business success. You can’t easily be everything to all people.
Your business plan should show that you understand your customer base and that your product or service is attractive to them.
Your target market might be people of a certain gender or age, be in a certain income bracket, or have a certain occupation or level of education. Your customers might have a specific interest.
In narrowing down your customer base, you reduce the potential size of your market. But you focus on creating a product or service that a greater number of that market will want. Once you are successful, you can launch a new product or service in the same market or expand into a new market.
If you operate in a small market, you have fewer competitors and can see their strengths and weaknesses more clearly. Competing is easier.
Another advantage is that in a smaller market it is usually easier to anticipate demand. This makes financial forecasting easier. You may also be able to react to changes in the market more quickly.
Your plan should state the size of your market and what share of it you intend to take. Your expectations need to be realistic if they are to be taken seriously.
If anyone has already expressed an interest in your product or service, you should mention it in your business plan. If you have already received a letter of intent to buy from you, it will make a reader more confident that there is demand and that there is cash flow in the short term.
Competitor analysis
This section aims to show that you understand your competitors and their strengths and weaknesses.
You should first identify them. They may be in the market now, but they also may be businesses in a similar market who could enter your market soon.
You might want to provide a lot of information about each. There is scope to write the same amount for each as you write for your own business. If you do want to provide detail, consider providing a high-level summary here, and the detail in appendices.
You need to show that you understand the same information about them that you are presenting about your own business. That includes their unique selling proposition, their market share, which markets they are in, their strengths and weaknesses, what they sell, how they sell, what experience they have, how successful they are and their financial information (insofar as you can obtain it).
Researching your competitors is interesting. It provides you with ideas as to how to make your business better.
Pricing strategy
Pricing strategy is not just about what price you’ll set. It is an opportunity to think about how customers are charged for your products and services.
Getting your price right is very important. There are books on the subject, some of which are very accessible and worth reading.
There are reasons why you might not aim to price your product or service as low as possible – not all customers are price sensitive, and not all customers know whether your price is good or bad.
For example, your price can signal quality where there are few other differentiators in the product.
If you can differentiate your product or service against others, for example by competing in a very narrow niche, you can often increase your price because your customers are less price sensitive.
You might charge a single price for each product, offer volume prices for sales of multiple products, or make your proposition one of a service by offering a subscription for unlimited access.
Customer acquisition is expensive. You may be willing to make a small profit margin on the first sale to entice the customer back to make further sales at higher profit margins.
Marketing channels
You can find customers in many different places. Your business plan should describe where you will market your products and services. This might be off-line, from traditional print media such as newspapers or magazines, or word of mouth, online, or via direct mail or face-to-face.
If you sell to people who are not in business, consumer law will apply depending on how you sell. The law for selling from a shop is very different to the law for selling from a website.
Certain channels of marketing will be more effective for generating sales but may be more expensive. You should therefore look to the most profitable channels rather than those that generate the greatest amount of income.
Sales funnel
The sales funnel comprises of the steps a customer takes before buying from you. Your business plan should describe your main funnels.
As examples: if you sell from shop, customers are likely to come in and browse, perhaps before being helped by an assistant, and then asked to move to the checkout. If you sell online, the customer might visit the social media site, before being referred to your website, leaving to research competition, then returning for more information before buying.
Ideally, not only should you be aware of every stage in the funnel, but you should have plans as to how to improve each stage over time.
Business operations
This section is a description of how you produce your product or service.
It should describe how you plan to take inputs and convert them to outputs. If you sell a product, you might describe your suppliers, your supply chain and your distribution. If you manufacture a product, you might describe your design process, your manufacturing process and your packaging process. If you provide a service, you might describe how you find employees or contractors to provide that service, and how maintain service levels.
Balancing the cost of production versus the ability to grow fast is difficult. It is a challenge for established businesses as well as start-ups.
Your business plan should be to keep costs down to keep profit margins high, but you also need to make sure that you meet growth targets for sales.
You will need to decide who to hire, and on what basis, and whether to lease machinery or to buy it.
Your business plan might also cover where the business is carried out. If you are a one-man (or very small) business, working from home might be a possibility.
However, if you employ staff it is likely to be more productive for you all to work in the same office.
If you are making your product, it is even more likely that you will need your own premises.
Your business plan should set out your requirements for space now, and how you plan to expand as you grow. For example, you may rent a spare room in somebody else’s offices while you start, look to move to a larger co-working space, and then look for your own suite of offices.
Depending on your business you may need licences to operate, for example, to sell alcohol, or to work with children.
If you employ any staff, you may need Employer’s Liability Insurance. You’re also likely to need other types of insurance, such as to cover breakdowns of expensive, key machinery.
If your business needs specialised machinery, your business plan should describe that machinery and how you will fund buying it. Purchasing it may be the reason for seeking investment.
Your business plan should also mention your key suppliers. It should explain the advantages and disadvantages of using different potential suppliers, and why you have chosen any particular one.
If you have already asked your suppliers for estimates, these can be incorporated into your financial projections.
Ownership structure
This section should cover how the business is structured, and who owns it.
For example, you may be a sole-trader, be working in partnership with others, or you may have incorporated the business into a company with other shareholders.
You don’t have to set out who owns exactly what in your plan, but you should state who has control over the business (e.g. who are the major shareholders).
Investors will want to know what proportion of the business they are being asked to buy, and what control they obtain in return.
The proportion that is for sale at the price that you are selling it gives a valuation of your business. This needs to be realistic. An investor is likely to want a controlling share (more than 50%) unless the size of the investment is very low. If you are looking for an investment to buy an expensive piece of machinery as a start-up, expect to sell a large proportion of the business in return.
Both an investor and a lender will be concerned to make sure that their money can be recovered if something goes wrong and that the legal structure does not prevent this from happening.
Financial information
Although a forecast is only an expectation, financial plans should consider enough detail and contains sensible assumptions so that they are reasonable.
Anyone relying on your business plan to make a decision, whether to invest, lend money to you, or join you, will want to be confident that the sums add up. Including financial information in your business plan shows that you understand the critical money side of running your business.
Most important is the cash flow forecast. If you’re looking for money, the amount you need, and will be given will be determined from your cash flow projections. The saying within accountancy circles is that cash is king. In other words, having cash available at the right time is more important than making a profit, at least in the short term.
A cash flow forecast allows you to see when money is available for investment and when you need to save to pay future expenses.
The easiest way to create a cash flow forecast is by using a spreadsheet. Set out each item of income or expenditure in detail on a new row. Group them together so that they reflect the line items that are found in most sets of accounts. Use a new column to the right for each time period - usually one month. Below the amounts of money, set out your assumptions for each item of income or expenditure. Use your assumptions to build your model – either for other sections within the same time period, or for future time periods.
Because you are producing a cash flow forecast and not a set of accounts, you should write down when you expect to receive or pay cash, not when amounts are due or payable. In accounting terminology, you are showing your figures on a cash basis rather than an accruals basis.
For example, if your forecast shows cash flow month by month and you pay your rent on a quarterly basis, you should only record the outgoing rent in every third column.
Your assumptions must be reasonable if they are to be taken seriously.
For example, it might take several months before you make your first sale, and several months after that until you make enough sales to cover that month’s cost.
Investors are unlikely to look favourably at your capability to run a business if your assumptions are too optimistic. However, your figures should not be overly pessimistic either.
One way to balance optimism with pessimism is to provide cash flow forecasts under three different sets of assumptions - one realistic, one slightly more pessimistic, and one slightly more optimistic. If you can show that even under the worst conditions the business should be okay, you will give more credibility to your realistic assumptions.
You might also want to create a profit and loss statement, also known as an income statement. This differs from a cash flow forecast in that it accounts for income and expenses that you have not yet received or paid. In other words, it is on an accruals basis. For example, you might bill a client in one month but not expected to be paid until the next. On the profit and loss statement, the income would be accounted for in the month that you bill the client, but on the cash flow statement the income would be accounted for in the month are paid.
If in doubt, you ask an accountant to help you. For a trained professional, a cash flow forecast is a relatively easy job that won’t take too long (and therefore won’t cost you too much), and being able to say that you had professional help with it will lend credibility to your projections.
Financial requirements and exit strategy
Your cash flow statement should support the amount of money that you are hoping to receive as an investment or a loan and the timing of when you need it.
In this section, you need to state why you need the money, and provide some proof that it will be enough to achieve your aim.
The money may be needed in one payment, for example to develop the first batch of products that will then generate sales to be reinvested for future development costs, or in several.
From investor’s point of view, having less money at risk is always preferable. Therefore, it may be to your advantage to ask for several small investments contingent on certain events happening (known as investment rounds), rather than one lump sum straight out.
An investor will also want to know when the money will be repaid. You might be able to do this by generating cash, but you might also do it by generating value in the business and then selling shares to other people. If you have ideas for an exit strategy for an investor, it may show an investor that you understand their needs as much as your business needs.