Firstly, lets start off with the definition of a business plan. A business plan is a document setting out the business idea and showing how it is to be financed, marketed and put into practice. It is likely to be a crucial part of an attempt to raise finance from outside sources such as a bank.
Purpose to a Business Plan
Starting a business is quite complex, as it requires a lot of different tasks to come together in a coordinated way at the right time. For example, if you are opening your first restaurant, all the following tasks must have been completed on the day before your opening night: building work, decoration, kitchen equipment bought and fitted, staff hired and trained, menu chosen and printed, wines chosen and delivered, and wine list printed, food supplies bought, tills and credit card-reading equipment in place, and so on. For this to work without a clear plan is asking for the impossible. A business plan, then, seems essential for start-up success, yet most entrepreneurs treat a business plan as something banks ask for (i.e. something for others, not for themselves).
The Content of a Good Business Plan
A good plan should be persuasive to an outside investor and useful to the entrepreneur. It should explain what makes the business special and help the entrepreneur to keep sight of what s/he is trying to achieve. Despite this, it is clear that a business that needs capital will concentrate mainly on the outside investor, This might be a bank or (less likely) a ‘dragon den’ type of investor, who will buy an ownership stake in the business. A bank’s main concern is that the start-up will be a safe investment, whereas a ‘dragon den’ is mainly interested in the upside potential (i.e. the chance of making a huge profit).
The heart of the business plan should be based around competitive advantage. This means identifying the features of your own product/service that will make it succeed against competitors. This might be based on a unique idea, a better product/service or the protection provided by a patent or copyright.
Every business plan should contain the following sections:
- Executive Summary – this should be short, but compelling enough to persuade the busy banker to want to read on. It should say who you are, what the customer’s pain is and how you will relieve it, why your team is ideal for the task, how much capital you need for the start-up, and how much you are putting in yourself.
- Details of the Product/Service – explain it from the customer’s point of view – for example, with smoothies, not ‘we’ll crush fruit and put it in a bottle’ but ‘it’ll provide busy people with two portions of fruit in an enjoyable, un-messy way’. If others already offer the service, you must explain what is different about that idea which could be a USP (Unique Selling Point).
- The Market – focus on market trends rather than market size (i.e.e whether a market is growing and if so, how rapidly). There is a need to provide a brief analysis of key competitors.
- Marketing Plan – how do you plan to communicate to the customers you are targeting? How expensive will this be? Within this section should be explanation of and justification for the prices you plan to set, plus a forecast of likely sales per month for the first two years.
- Organisational Plan – explain who will be in the team and how they will be managed and organised; CVs should be provided for all key managers.
- Another Organisational Plan – how the product or service will be produced and delivered. This might involve production in China, in which case you will need already to have made contact with willing suppliers.
- Financial Plan – the heart of this will be a cash flow forecast. This will give an idea of the bank balances over the start-up period and therefore the financing needed.
- Conclusion – this will include some idea of the longer-term plans for the business, including any ‘exit strategy’ (e.g. plan to sell the business within five years).
Benefits of a Business Plan
- Forces the entrepreneur to think carefully about every aspect of the start-up, which should increase the chances of success.
- It may make the entrepreneur realise he/she lacks the skills needed for part of the plan , and therefore will make them try harder to employ an expert or buy in advice.
- If the plan is well received by investors, they may compete to offer attractive terms for obtaining capital.
- Most entrepreneurs have the whole plan in their head and not actually on paper. If they are hit by an illness or some type of accident resulting in them having time off, others can keep things going by following the paper plan.
Negatives of a Business Plan
- A cash flow forecast is only a prediction, and many entrepreneurs confuse this with reality. Poor sales can come as a terrible shock.
- The majority of problems arise where the plan is too rigid. It is better to make the plan flexible so that you are prepared for what to do if sales are poor (or unexpectedly high).
- Plans that are based on high sales will require lots of staff to meet the demand. Risks are usually lower if the business starts with a low-cost/low-sales expectation.
- Business success is often about people, not paper; an over-focus on a perfect plan may mean too little time is spent visiting suppliers or talking to shoppers.