Would be entrepreneurs are in a constant dilemma whether to write a business plan or simply take the plunge. They juggle between two approaches that have long been in a face-off with each other.
To Plan Vs Not To Plan
The first approach claims that a startup should simply act on its business idea, become better and support itself. It should not waste time in preparing lengthy business plans that are good for nothing.
The second approach, however, is pro business planning. It says that business plans are the road map for successful business ventures. Entrepreneurs who plan have higher odds of achieving venture viability. Business plans help you to know what you want to achieve and how you can achieve it.
Well, there are studies favoring both the approaches. However, here are some figures that are an outcome of a research undertaken by Harvard Business Review (HBR).
Research Figures Of A Study By HBR
HBR collaborated with Panel Study of Entrepreneurial Dynamics II to understand the importance of entrepreneurial planning. They took a sample of more than 1000 would be U.S. entrepreneurs over six years from 2005 – 2011. These entrepreneurs were divided into two groups – one who would write formal plans and the other who would not.
Here are some of the conclusions drawn from this study:
- Entrepreneurs who write formal plans are 16% more likely to achieve venture viability over those who don’t.
- There are a host of factors that encourage entrepreneurs to plan. High – growth oriented startup entrepreneurs are 7% more likely to plan. Those with disruptive ideas are 4% more likely to plan. Similarly, entrepreneurs wanting to raise finance are 19% more likely to plan over those not seeking finance.
- Other factors like the background of entrepreneurs, their experience and startup setting too increase the likelihood of venture success.
While it pays to plan, simply putting your plan on paper isn’t enough for your startup to thrive. The kind of planning you do is also what matters.
Hence, before jumping into the elements, it’s important to understand the difference between a good and bad business plan.
Good Vs Bad Business Plan
A good business plan is:
- simple to understand
- realistic in terms of goals, strategy and implementation
- one that specifically delegates work, sets milestones, defines cost, financial plan, sales and marketing strategy and implementation
- the one that generates results for your business
A bad business plan is:
- made of exaggerated, fluffy terms
- one that vaguely outlines the idea, investment amount, sources of finance, marketing and sales strategy and everything that makes a business plan
- the one that leads you nowhere
Let’s consider an example to have a better understanding of the components of a business plan. This contains highlights of the executive summaries from the business plans of two entrepreneurs planning to come up with a startup.
Mr. Vague and Mr. Specific both want to come up with their respective online fashion stores.They want to sell apparel and accessories that cater to both men and women in their 20’s. Both of them plan to put on paper their respective business ideas before taking the plunge.
Components Of A Business Plan
1) Executive Summary
Executive summary is the outline of your business plan. It’s objective is to sum up the focus points of your plan and tempt readers to go through the remaining plan. Think of it much like a movie trailer. Trailer is made out of best scenes of the movie to spark interest of the movie buffs.
Executive summary too must contain the best parts of your business plan to grab interest of outsiders. It should be crisp and clear.
Here’s a pro tip for writing executive summaries. Since it summarizes the key points of your plan, you should write it in the end. It becomes much easier.
Not all plans need to have an executive summary though. You don’t need an executive summary for a plan for internal purpose. It is usually included when one wants to present the plan to the outsiders – banks, venture capitalists etc.
So, What Goes Into An Executive Summary?
- Business name, place and contact details
- List of products or services you wish to sell and customer pain you plan to resolve/value proposition
- The target market you want to cater
- Your intent of writing a business plan – whether for availing loan, seeking investment etc
- Your competitive advantage against competition. Key factors that will be responsible for your success
- Your marketing and sales plans
- Financial projections for minimum three to four years
- A brief background about owners, their background, expertise and experience
- How do you plan to execute the plan – the responsibilities, milestones, deadlines, processes etc.
Highlights From Mr. Vague’s Executive Summary For His Online fashion Store Mod Up
Mod Up is an online fashion store that would offer high quality fashion and accessories for young as per the latest trends in fashion . Mod Up is confident that it can offer ace quality fashion and accessories. This is because of the prior experience of its owners in fashion and accessories industry.
Its products are decently priced and made keeping in mind the latest trends. This will undoubtedly appeal the young. Needless to say, it is any day better than the competition. And is bound to grab a good market share within no time.
Its target market would be young men and women who long for trendy fashion apparel and accessories.
Mod Up’s offerings would always let young men and women make a fashion statement. All this and more, at a price that none can offer.
Highlights From Mr. Specific’s Executive Summary For His Online fashion Store Chic Cuts
Chic Cuts is a new online fashion destination. It will create and curate products and experiences that inspire fashion-loving 20 year old millennials. It will work as an all in one fashion destination by choosing the best fashion items from a variety of brands and grouping these items with the company’s own products. Chic Cuts will emphasize on diversity – from celebrity styles to nightwear, maternity clothes to other forms of fashion. Basically, it will have something to suit everyone in their 20s.
Chic Cuts product lines will include clothing, accessories, face and body for both men and women. William Miller and Harper Gray, co-owners of Chic Cuts, together have close to ten years of experience in the fashion accessories industry. Harper Gray has been an associate clothing designer for Rage Apparel for the past four years. William has been the webmaster for Cult fashion for the past six years.
Apart from diversity, it will publish high quality editorial content about shopping tips, celebrity style, outfit ideas, how to articles and DIY. The online magazine would allow readers to simply click at item they like and shop right there, from the page. And finally, it will authentically communicate with its customers by creating a group of millennials. These millennials will offer fashion inspiration for every type of Chic Cuts customer by sharing their outfits of the day and distinct styles on social media.
Chic Cuts’ mission is to become the world’s number-one destination for fashion-loving 20-somethings. Its a unique, multi-platform experience that truly resonates with the people who use it. This is because it’s built by them.
Factors To Success
- Diversity in products
- Delivering high quality content
- Free shipping and distribution efficiencies
- Using social media influencers for promoting products
- Easy purchase options for customers
If we see the above example, Mr Vague’s business plan holds no value. It makes a good example of a bad business plan. Mr. Specific, on the other hand is very clear with his target market, mission and factors that would lead to Chic Cuts’ success.
2) Company Summary
This section again is included in business plans that are meant for the outsiders. You don’t need a company description for plans for internal use. Outsiders are interested to know everything about your company that helps them understand your business.
An impressive company summary must give readers essential details such as:
- products it plans to sell to specific market
- the benefits it offers
- factors that make it better than its competitors
- some company numbers – past performance in case of on-going business and start up costs in case of startups
- Important events in the history of an ongoing business such as some changes, exceptional years in terms of profits, loss making events, new line of product/service etc.
Here’s a list of things that go into the making of the company summary section in a business plan:
- Entity Name: includes the name of your company
- Type of Ownership: state the type of ownership such as sole proprietor, partnership, corporation or limited liability partnership.
- Business Location: describe the offices or locations of your company and what function each performs.
- Business Proposition: the value your business will create or the benefit it will offer and the price it will charge as against the competition
- Competitive Advantage: how is your company better than the competition? Examples can be having a proprietor technology, product, process etc
- Company History: According to Tim Berry, an on-going business must include the past performance of its business. This can include sales figures, operating expenses, some important business ratios like collection and payment days etc. A minimum three year projection of such numbers is good enough. You can also include a brief on important events, changes, new products etc. Startups can include an estimation of amount needed to meet expenses before starting up, assets, start-up loss and capital.
3) Products Or Services
This section must include detailed description of products or services you plan to sell. Again, this part of the business plan is more important to external readers than to internal users. Always specify product or service offerings in terms of customer needs that these fulfill. As you write the existing needs that your products solve, you can identify new customers and needs that your business can fulfill.
Highlight the focus points that make your business offerings stand out against the competition. Describe in detail your business offerings, what purpose they solve, how are they better when compared to competition, how much do they cost etc.
Analysis of your business offerings against competition helps readers understand how are you better placed in the market.
4) Market Analysis
Well, this is the most important part of the business plan. In fact, it’s not a business plan, but an understanding of potential customers that you need at first place. Your very business idea must originate from a potential customer need. You identify a customer pain and think of a product/ service that could solve that pain. Then, you try to understand if their exist sizable customers who are willing to pay for such a product/service.
Still, most of us simply ditch the idea of defining our potential customers. Clearly defining your customers helps you establish that the problem you’re planning to solve is real. It is something that people want or need and are willing to pay for it. It helps you have a better understanding on your value proposition and uniqueness against competitors. Creating customer personas is a great way to understand your target market.
Here’s a what you must include under the market analysis section of your business plan:
1) Industry Overview
- Industry Overview
- Use this section to lay out the details of your industry
- its current state
- any major rules or changes implemented or seen coming
- projected growth
A detailed industry outlook makes banks, investors understand that you have thorough idea of your industry and business idea.
2. Target Market
This section must define your customer personas and market size. Customer personas help you identify your market segment and authenticate the need of your product or service. Defining customer habits, interests etc helps you to not only validate the existing need. It also helps to improve on your business offerings and identify new set of problems that you can serve.
Consider the case of Mr. Specific’s fashion online store. He’s clear that he has to provide fashion apparel and accessories for men and women in their 20’s.
Customer personas authenticate the need. Whereas, market size tells you how big is the market that you are targeting. How many people buy or would buy such products/services? How much will they be willing to pay?
3. Competition Analysis
It’s extremely important to have an understanding of what your competition is offering. The strengths and weaknesses of your competition help you know:
- areas you can improve upon and
- ones you can serve.
Make a list of main competitors and understand the products/services that they offer. What is their value proposition and competitive advantage? Why customers buy from them? What are their weaknesses? How can you provide what your competition is not able to serve?
Apart from the competition, try to understand the constraints of entering into the industry. The challenges that you would face – longer break even times, higher costs etc
This is where you make projection about the market share you would be able to seize considering:
- the number of customers who would buy from you
- the amount of money they would be willing to pay
Also forecast the prices of your business offerings and any discount that you plan to give.
5) Business Strategy And Implementation
Before defining the business strategy, it’s important to understand the value proposition of your business. What benefits are you offering to the customers, at what price as against the competition? How will your business offering better solve the problems of your target market against the competition?
Once you have a clarity on your business proposition, next comes the business strategy. How do create visibility for your business idea? How do you plan to convert potential buyers to customers?
Here’s what comes under the business strategy and implementation section of a business plan:
1) Marketing Strategy
This basically specifies the tactics you plan to adopt to create awareness of your business idea. Here are some questions you must answer under this section:
a) How do you seek to position your business?
When deciding upon the positioning of your business idea, you must define the following things:
- your target market
- it’s needs that your business offering would solve
- how will it meet those needs
- who is your competition
- aspects in which your business offering is better than the competition.
b) How do you seek to price your business offerings?
List the prices of your business offerings and compare them with competition. Given your value proposition, how is your product/service priced against competition.
c) How do you seek to create awareness of your business idea?
Use this section to specify the means through which you seek to reach your target market. Medium of communication with your potential customers such as print, digital, tv, PR events etc should be clearly specified.
2. Sales Strategy
Now this is where most of us go wrong. Sales strategy needs to be written separately from marketing. This is because sales and marketing are separate from each other. Your marketing efforts help increase your idea awareness and visibility. Whereas, sales convert the potential leads to customers.
When defining your sales strategy, make sure you clearly define:
- your plan to convert potential buyers to customers
- your compensation and training plan for sales people
- Pricing tactics you plan to adopt to convert prospects to customers.
6) Management Overview
When it comes to people, it’s not as simple as identifying various functions in your company and assigning job roles accordingly.
Also, its not just about filling job positions with people. You need to ensure that right person takes up the right job in your company. For if there exists a mismatch, employees lose the motivation to work. As a result, the entire thing goes for a toss.
Keeping this in the backdrop, include the following things under the management summary section:
1) Organisation Structure
Identify the key functions in your startup and assign responsibilities accordingly. Also, ensure that adequate authority is given to each job role. Coming up with an organisation chart helps outsiders in easily understanding the structure. But if that is not possible, you must clearly define the roles, their responsibilities and who reports to whom.
2) Management Background
Prepare a list of people that form a part of your management team. Write down their qualification, experience, skill sets etc that they would bring along with them. Also mention the roles they would take up in your startup.
3) Personnel Cost Projections
Under this section, come up with your personnel cost projections. The cost projections could include compensation figures and employee benefits.
7) Financial Summary
This is another important part of your business plan. As a startup, you need to plan for cash flow. How much do you need to meet your working capital requirements? This is where most of the startups go wrong or become complacent. Many startups run out of business not because they aren’t profitable. They do so because they run out of cash.
If your venture is profitable, it doesn’t necessarily mean that it has sufficient cash to meet its business expenses. Profits and cash flows are separate from each other. That being said, you need to consider items in your financial statements that impact your cash balance.
Say for example the collection period. More the number of days of collection, lesser the cash. Higher the inventory, lesser the cash. Similarly, more the creditors, more the cash balance.
Here are certain items that impact the cash flows from business operations:
Items That Increase Cash Balance
- Cash Sales
- Decrease in Current Assets
- Sale of Long Term Assets
- Cash received via New Current Debt
- Cash Received Via Long Term Debt
- Outstanding Creditors
Items That Decrease Cash Balance
- Credit Sales
- Increase in Current Assets
- Purchase of Long Term Assets
- Payment of Current Debt
- Payment of Long Term Debt
- Outstanding Debtors
Needless to say, cash flows are prepared from your income statement and balance sheet. In addition to these financial statements, you must include certain business ratios, depending upon your industry.
Changes in these ratios over time give you some very important insights such as
- company’s performance as against the industry
- its potential to pay off the debts
- overall financial soundness of the business etc.
Lastly, come up with a break – even analysis. This gives you number of units you must sell to make enough revenue to cover your costs.
Business plans become the very reason for outsiders to show interest in your business idea. Hence, you must include the above components to make it valuable both for outsiders and your business.