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Why You Need a Business Plan Before You Start a Business
I'm a big fan of Quora.com and not because I look to feed my ego answering awkward questions with obvious answers. It's also not because of the social media 2.0 site that has taken pieces of several sites that people adore and put them all together in a way that lets people do the aforementioned ego stroking. No, I am a fan because in the back pages among the rubble and gobbledey gook there are questions that actually make sense to answer with more than get help, now.
Recently while perusing the pages, I found a question that stuck out to me as silly (at first) and inspired this hub.
Why is it important to have a business plan?
This question is like asking why would a contractor use blueprints to build a house? To me, an entrepreneurial spirit, it seems simple but I realize that not everyone is business minded like me and genuinely want to understand why they need to spend countless hours building a business plan. Simply stated a business plan is the blueprint of your business and without it, you'll likely find it difficult to catch the attention of Angel Investors or investors in general without it.
What is a Business Plan?
Business Plans are, as I stated, the blueprint to your business. It outlines the current state of your business, where you plan to go with it, and the current/future financial projections you've calculated. The idea of a business plan is to have a starting point and we all know that is the hardest part of any project. Where to start.
If you assume the starting point of any business is the business plan, you've got a leg up on the competition and a pretty hefty negotiating tool when it's time to raise capital. Investors don't ask for this upfront but they may have a hard time putting their hard earned dollars into your venture without proof that you know your ish.
Think about it like this. If you bought a piece of land and hired a General Contractor to head up the operation, you would want to know the plan prior to starting right? You'd want to understand who and when will put in the foundation, who and when will put up the frame and the timeframe in general for it all to come together. Would you work with a contractor without a plan? I surely wouldn't!
Basic Business Plan Structure
Now that we know what a business plan is, let's look at the basic sections that you will need to build the perfect business plan.
Section 1: Executive Summary
This is the first section although it is always recommended to write it after you've completed every other section. Weird I know but it's a summary of the key points that you've made throughout the business plan and is the first thing investors and banks see when they look at your plan.
This is the first impression so make sure the Executive Summary is robust and confident so the reader of your plan is so impressed that they can't help but keep reading, rather than moving your plan to the NO stack right away.
Section 2: Company Summary
The Company Summary is the inner workings of the company and what your vision for your market is/will be. You should include:
- Who and when the business was founded.
- The state you are registered in and where you do business.
- When/if your company was incorporated.
- Recent sales and the growth trajectory.
These are the nuts and bolts of your business. The details here will tell the potential investor you're serious about what you're doing and that they made the right choice in learning more about your business and your plan.
Section 3: Products and Services
This seems as if it would cut and dry with little information in a table. That is not the case. This section is more than we are x business and we sell y products and they cost us z. Although this is the information that will be covered in this section it's not this simple.
Instead of seeing this as a section to detail the products or services [or both] you are going to sell. Instead, use it as a chance to see what you're selling through your customers eyes. I heard a great saying recently from Jim Desrosier of GrowthCo. "In order to know what Bill buys, see the world through Bill's eyes."
Essentially what he's saying is know your customer and their needs. Use this section to write the product descriptions with the reason your customers will want/need them. This will also allow your creativity to shine through as you decide how you would present them later to your desired market. Without knowing your market, you're not going to know what they want anyway and that's the importance of the next section. For now, be sure to include:
- What is it?
- What does it cost?
- Who wants it and why?
- What needs will the product lines fulfill for customers?
If you can answer these four questions you're on your way to a better day.
In order to know what Bill buys, see the world through Bill's eyes.— Jim Desrosier, GrowthCo
Section 4: Market Analysis
Market Analysis like every other point in your plan is important. If you don't know your current market then how will you know who wants your products and why? Just like the why in your business is important it is imperative to know the why of the person spending their money.
You don't have to spend boat-loads of money to learn who will and won't buy your products (or services) it is almost as easy as a simple Google search really. Understanding your market can come from a Tweet asking current connections opinions, sending out a survey with your basic ideas and researching the www for information on competitors.
It's unlikely you're selling a product so rare and difficult to obtain/sell that you are the only one in the world selling it so check out the competition. Don't copy their strategy that's uncool, but you can learn your target market by understanding their target market.
Knowing who you are going up against and why you're comparable, if not better, is key in launching a successful business. UFC fighters, sports professionals, smartrepreneurs all know the importance of understanding the competition and what their next move may be. If you're not willing to strategically understand the components of the business than you're not quite ready to hit print on the plan just yet.
Section 5: Strategy and Implementation
Strategy and Implementation can be compared to the foundation of the home. The plan is riding on this critical piece. Sure, you have to fund it and raise capital and that too is critical but if you don't know where you're going or how to get there well, you're going to get lost. That's what strategic plannng and implementation is all about.
This is where you're going to say what you do for your desired market, and why you think your ish is better than others. It's simple really. You went into this business because you found you could be as good, if not better than the other people doing it and it's a lucrative bun to nurture in the oven. It's also where you're going to define exactly how it's all going to come to fruition down to trackable data to prove you really do know your shiz and you didn't just walk into you meeting with a fancy suit and bull shiz in your pocket.
Describe in detail how you're going to attract and retain your customers. Why will they remain loyal to you if Jack and Susie do the same with better initiative and customer service. Create realistic budgets and include key management and dates that these action items will be completed by. After all, the reason we need this plan is to do exactly that, implement the strategy and begin making a profit.
Walk in with more than a flashy suit and bull shiz in your pocket.
Section 6: Management Summary
Just in case you were wondering when you would need to insert your resume to really impress the pants off of the banks and investors, this is the time. Not only do you need a strong resume to find a job but you also need a strong resume for yourself, you'll also need one for each key member of your management team.
This is an overview of the current internal setup of your business. What cogs are in place to make the business work in a positive fashion toward a profit? Much like the summary of each of the sections, the summary here should indicate an overview of the team, philosophy and the procedures in place.
Use this a great mini resume for each of your team members and outline some of the following:
- Who they are and what they do
- Why they are the best for this job
- The experience that backs up why they're the perfect fit.
Even if you're a direct sales agent working in your home office, include your salary and the expenses as if it were a larger organization and treat the personnel cost question as if you had 5 employees. If you delegate or outsource outline this here. All costs associated with employees is important when understanding what it costs to run the business and calculate the profit margins you seek.
Section 7: The Financial Summary
We've finally reached the part that I find few people enjoy, the financials. The Financial Summary is the hub of all things money in your business plan. This is what the banks and investors are really going to look at to see if your ish is for real or your numbers don't quite match up.
If you've ever an episode of Shark Tank you'll understand what I mean by having your money summed up tight. Although the premise of Shark Tank is a pitch to investors, after you've done the work and developed the plan, you still need the financials from the plan to make it work.
Since this hub is more of a 101 style and not an in-depth look at business plan creation you will likely find variations of what needs to be in this section but I want to cover the basics, at least:
- Cash Flow Plan - Money makes the biz go 'round.
- The P & L - Profits and Losses cover cost of sales, operating expenses, profits and total sales.
- Pro-Forma Balance Sheet - assets, liabilities, and capital.
- Sales Forecast - if you're not sure, use a summary. Don't use fictitious numbers
- Personnel Plan - This is a fixed cost. It may be an item on your income statement
- Business-Ratios - This information comes from the pro-forma balance sheet.
- Market Forecast - Summarize the market. Customer base number and potential customers? Impact of growth?
Okay, so that was actually a lot and it will take time to build a proper business plan but it's worth it. Not only internally is it a great tool to keep you on track but necessary when building capital so don't skimp. Break it into smaller sections to avoid becoming overwhelmed and you'll be ready for business.