There are some of you who have thought and lived business since beginning. Doing business is what drives you. And you did it right.
However, many of you got into it simply because you fell in love with the idea of doing it. False beliefs, that doing business will enable you to work on our terms, got you in. Only to kindle failed ventures! You have been putting unrealistic hours of effort and doing work for free. All in the hope of doing great some day.
The Truth Behind Start Ups
That’s how this start-up thing is understood. Get a unique idea, quit the 9 to 5 set-up, practice crazy hours of hard work and voila, you rule the world!
The truth is, if your business idea isn’t creating value for people, it’s bound to go nowhere. First comes the need or want of people that a startup plans to solve. Then comes the hard work. Working hard for an idea that looks good, but doesn’t solve a real purpose is a mere trap. You end up chasing something that will never work. No matter how much effort you put in. No matter how much free work you do.
Chasing a business idea without understanding the realities can be very dangerous. Is the idea practical? What purpose will it solve? In fact, identifying the pain areas of people is how you come up with a business idea at first place. Are there customers who would need or want such a product or service? Will they pay for such a product or service? What is the cost attached to it? What will be the break – even point? All this needs to be thought of or put on paper before starting off with anything.
And this where importance of a business plan comes into scene. So let’s first define a business plan and understand why it’s needed.
What Is A Business Plan?
A business plan is any written document that allows you to visualize how your business idea will take shape given the product or service that you wish to sell, market, business strategy, working capital, personnel cost, expenses etc. Basically, it’s the future of your business put on paper. It’s the description of what you plan to do and how you plan to implement the same.
However, a business plan is a mere written representation of your business idea until it generates results for your business. How much money your business is able to make based on the business plan is what matters. A good business plan is realistic. It demands your commitment by delegating work and assigning responsibilities. It sets milestones, deadlines and can be tracked for variance in planned vs actual performance.
A business plan must be able to tell a start-up if its idea is feasible. An ongoing business must be able to understand if it needs investment for growth and development.
Needless to say, if you dare to be complacent about having a business plan, you are doomed anyway!
Purpose Of A Business Plan
Be it a startup or an ongoing business, having a concrete business plan is extremely important as it helps to:
- identify business objectives and means to achieve them
- measure variance between planned and actual performance
- convince investors to provide investment
- identify new business opportunities
- evaluate feasibility of a business idea in case of a startup and new product or service line in case of an established business
- lay down the organisation structure
- attract desired executive candidates or partners for business
With its purpose in the backdrop, let’s have a look at the components that make a business plan.
Business Plan Structure
The components of a business plan, as suggested by experts, comprise of standard elements. However, the format or framework may vary depending on the type of business plan you choose.
1) Executive Summary
2) Company Information
3) Products or Services
4) Market Analysis
5) Business Strategy and Implementation
6) Management Summary
7) Financial Plan
Building A Business Plan
As said earlier, a business plan holds no value if it isn’t generating results for your business. This means it’s critical to do it right! For your business plan to impact your business results, you must work out the following aspects.
1) Select A Plan That Fits Your Purpose
As mentioned above, there exists a standard format for a business plan. However, you must tweak its contents according to the business purpose you seek to accomplish.
For example, if you plan to approach venture capitalists for funds, including information about management is extremely important. Venture capitalists invest in people and their business ideas.
Similarly, an ongoing business approaching banks for loans must include its financials. Banks rely on your financial statements to disburse loans.
A startup can similarly come up with an initial plan to understand if its business idea is practical.
2) Your Business Idea Is A Failure Already If It Doesn’t Solve A Customer Pain
How do you locate a business opportunity at first place? Well, by identifying the problems sizable amount of people are facing. Because that’s where the opportunity lies. It must be something people want or need.
If it’s anything apart from the one that solves a customer pain, its just an endless road with no particular destination. It’s a business idea that sounds intelligent, big, flashy and interesting but holds no future.
It makes you burn money, time, effort and human resource. It keeps your hope for results upbeat.
But gives no return. How can your hard work and sweat help if what you’re trying to move is a wall?
Are their customers for my product or service? Will they pay me the price for it? How much will they pay? How many customers are willing to buy such a product or service? All these questions need to be put on paper.
3) Check If Your Business Idea Makes Sense
Whether you are a start-up, planning to start a business. Or an ongoing business, planning to launch a new product line.
You need to ask yourself this question ‘Is my plan feasible?’ Once you know that there exists a market for your product or service, draw an initial plan to understand certain basics.
Things that you can consider for the initial plan could be:
- Objectives: what are your goals, the benefits you wish to offer, to whom and at what price
- Important Factors of Success: what key points would lead to success of your business – people, location, price etc
- Market Analysis: who are the customers, where are they located, will they pay, how much will they pay, what are the costs associated to offer them these benefits
- Break Even Analysis: at what sales volume will my business break even
4) Put On Paper What You Sell Or Intend To Sell
You need to keep handy the list of products or services you are selling or wish to sell. Describe in brief each business offering, the benefits these offer, the cost, customers who buy them etc.
Also mention as to how do you plan to manufacture the product or fulfill a service. How are your business offerings placed as against the competition. What is the value that you create for the customers. Why do they buy from you?
5) Undertake Management Analysis
This is important both for the start – up and ongoing businesses. A start – up may not have complete details with regards to management. But it certainly needs to understand the gaps it needs to fill. And how it wishes to fill them.
An ongoing business needs to describe the structure of the management. How are the roles defined in the company? What are the set of responsibilities of each role? What is the experience, skill and qualification of people who form part of the management?
Next, you should also understand the personnel cost attached in terms of both compensation and employee benefits. You can include both the payroll details as well as the employee benefits in a table to have a better understanding.
6) Study Your Industry
Including dynamics of industry you operate in is another important part of a business plan. Especially if you are approaching venture capitalists and banks for investment.
You must give a complete background of your industry, which can include:
- industry nature
- key players
- swot analysis of competitors
- key factors of success
- overall growth
- recent developments
- major government policies impacting the industry
There are various sources you can get industry information from. These could include industry chambers, government sites, publications, trade associations, libraries etc.
7) Evaluate The Most Important Aspect: Cash Flows
A good cash plan is vital for a concrete business plan. Many a times, companies go out of business not because they suffer from lack of profits. But because they run out of cash.
Increased sales, leading to increased revenue and bottom line is important. But profits and cash are two different things. Profits should not be confused with cash. As being profitable does not mean having sufficient cash to achieve milestones and meet deadlines.
Your income statement might show impressive profit figure. But insufficient cash to pay for day to day expenses can pose serious threats to the well being of business.
You need to understand what items on your financial statements impact your cash balance. And plan for cash accordingly. Where increased cash sales and accounts payable mean increased cash for business. Similarly, more of accounts receivable and inventory act as a drag on your cash balance.
8) Work Out Other Financials
Planning for cash flows requires preparing other financial statements simultaneously. These include projected income statement and balance sheet.
A projected balance sheet helps you to know the financial position of your company – assets, liabilities and capital at the end of an accounting period. You must also work out some important ratios, using these financial statements, to have an understanding of various aspects of business over time.
Take for example calculation of collection period for your business. This can help you to compare collection cycle with industry standards. And take necessary measures in case of a pitfall.
9) Explain Your Marketing Strategy
What are the list of things that you wish to achieve or benefits you wish to offer, given a pool of resources? Strategy is nothing but your set of most important considerations, your key focus areas.
Your set of priorities can range from targeting a specific market, market segment to availing a product opportunity, positioning your brand, playing on price etc.
Writing down priorities alone won’t solve the purpose. You also need to put on paper various approaches and business activities that will help achieve the priorities.
10) Write Your Sales Strategy
Your marketing and sales strategies need to be separately defined. Reason being they seek to achieve different goals.
Your marketing efforts help in increasing brand awareness and visibility, convincing prospects and making them fall into the lead funnel. Sales helps them convert.
Marketing seeks to generate leads which sales take up, to lead them to closure. Needless to say, alignment between marketing and sales efforts is extremely important for increased ROI .
11) Develop Expense Budget And Set Milestones
Devising marketing and sales strategies, planning for management structure etc all involve budgeting. You make expense projections, based on production, fulfillment, marketing, sales, distribution, personnel and various other aspects that form part of your business plan.
For a business plan to be executed properly, you need to make careful expense projections and resource allocations.
Ensure that your expense budgets are realistic and are linked to your milestones. The stakeholders part of the milestones should be engaged in developing the expense budget. This leads to increased ownership and accountability. Ensure that proper authority is given to stakeholders to execute responsibilities and handle the budget allocated.
12) Plan For Implementation Of Your Business Strategy
Having a good business plan is the first step towards its successful implementation. If your plan is realistic, delegates work, defines responsibilities of stakeholders with budgets and deadlines, it is bound to be implement successfully.
Apart from the plan, there are factors important for its successful implementation. These include a strong tracking and follow up process. Its critical to have process for comparing planned versus actual performance. Variance in performance can help you review the plan and make the necessary changes.