No matter how long you’ve been in operation, your business needs a plan. A good business plan can help you secure funding for your startup, or expand your operation.
Even if you aren’t looking for a capital infusion right this moment, a business plan can still be a great deal of help. The process of creating a business plan forces you to look at your business and evaluate what’s working — and what isn’t. It can help you focus on the right things and give you a roadmap to future success.
The Importance of a Business Plan
A few years ago, a software company surveyed its users to determine how helpful a business plan was to success. The results were reviewed by the University of Oregon for validation, and seem to point to the improved outcomes for those with business plans:
- Of those who created plans, 64 percent grew their businesses, compared to 43 percent of companies that hadn’t yet finished a plan.
- Those who created plans were more likely to secure a loan or investment capital.
A Babson College study discovered a written business plan wasn’t all that important — unless you were trying to raise money. In cases involving raising capital or getting a loan, businesses with plans were more likely to get the funding they needed.
Consider the company Coffee House, Inc. The founders are excited about providing a coffee shop for customers using their own brand of coffee. They plan to grind the beans at the coffee house to provide fresh coffee, as well as sell some of their product in bulk to customers who want to brew at home. They can also sell accessories to help customers make the most of their coffee experience, at the shop and at home.
Coffee House isn’t sure about how to proceed or measure success. A business plan can take ideas from the founders, put them to paper and provide a roadmap to take action.
Times You’ll Be Glad You Have a Business Plan
Any business hoping to raise funds, either with the help of loans or through venture capital, needs a plan. If you show up at the bank to ask for a loan, all the decision-makers will want to see a business plan. Venture capitalists also like to know that you are organized and informed and that you have a strategy to help them realize a return on their investment.
However, you can benefit from a business plan beyond raising money. Even if you aren’t currently looking for funding, you’ll be glad to have a direction when you are trying to figure out what your next step should be. The market analysis section can help you clarify your efforts so you focus on just the right thing to find your niche and exploit it.
A good business description can help you stay on track, while sales strategies can remind you of how you plan to increase your revenue. Your business plan is about organizing and planning ahead so you have the lay of the land and are ready to build your business in a way that makes sense. When you face uncertainty and you aren’t sure where to go next, your business plan can provide you with the guidance you need.
7 Elements of a Business Plan
Your well-thought-out business plan lets others know you’re serious, and that you can handle all that running a business entails. It can also give you a solid roadmap to help you navigate the tricky waters. The seven components you must have in your business plan include:
- Executive Summary
- Business Description
- Market Analysis
- Organization Management
- Sales Strategies
- Funding Requirements
- Financial Projections
All of these elements can help you as you build your business, in addition to showing lenders and potential backers that you have a clear idea of what you are doing.
1. Executive Summary
The executive summary is basically the elevator pitch for your business. It distills all the important information about your business plan into a relatively short space. It’s a high-level look at everything and should include information that summarizes the other sections of your plan.
One of the best ways to approach writing the executive summary is to finish it last so you can include the important ideas from other sections.
Coffee House, Inc.’s executive summary focuses on the value proposition of the business. Here’s what they’ve written into their plan:
“Market research indicates that an increasing number of consumers in our city are interested in the experience of coffee. However, there isn’t a viable place for them to meet and learn locally. Instead, they only have access to fast coffee. Coffee House, Inc., provides a place for people to enjoy fresh-ground beans and truly enjoy their cup.
“Coffee House, Inc., provides a hub for a subculture of coffee, offering customers a place to purchase their own coffee-grinding supplies in addition to enjoying the modern atmosphere of a coffee house.
“The founders of Coffee House, Inc., are coffee aficionados with experience in the coffee industry and connections to sustainable growing operations. With the experience and expertise of the Coffee House team, a missing niche in town can be fulfilled.”
2. Business Description
This is your chance to describe your company and what it does. Include a look at when the business was formed, and your mission statement. These are the things that tell your story and allow others to connect to you. It can also serve as your own reminder of why you got started in the first place. Turn to this section for motivation if you find yourself losing steam.
Some of the other questions you can answer in the business description section of your plan include:
- What is the business model? (What are your customer base, revenue sources and products?)
- Do you have special business relationships that offer you an advantage?
- Where are you located?
- Who are the principals?
- What is the legal structure?
- What are some of the market opportunities?
- What is your projected growth?
Answering these questions narrows your focus and shows potential lenders and backers how you’re viewing your venture.
3. Market Analysis
This is your chance to look at your competition and the state of the market as a whole. Your market analysis is an exercise in seeing where you fit in the market — and how you are superior to the competition.
As you create your market analysis, you need to make sure to include information on your core target market, profiles of your ideal customers and other market research. You can also include testimonials if you have them.
Part of your market analysis should come from looking at the trends in your area and industry. Coffee House, Inc., recognizes that there is a wide trend toward “slow” food and the idea of experiencing life. On top of that, Coffee House surveyed its city and found no local coffee houses that offered fresh-ground beans or high-end accessories for do-it-yourselfers.
Coffee House can create an ideal customer identity. The ideal customer is a millennial or younger member of Gen X. He or she is a professional and interested in experiencing life and enjoying pleasures. The ideal customer probably isn’t wealthy, but is middle class, and has enough disposable income to have a hobby like coffee. Coffee House appeals to professionals who work (and maybe live) in a downtown area. They meet their friends for a good cup of coffee, but also want the ability to make good coffee at home.
4. Organization and Management
Use this section of your business plan to show off your team superstars. In fact, there are plenty of indications that your management team matters more than your product idea or pitch.
Venture capitalists want to know you have a competent team that has the grit to stick it out. You are more likely to be successful and pivot if needed when you have the right management and organization for your company.
Make sure you highlight the expertise and qualifications of each member of the team in your business plan. You want to impress.
In the case of Coffee House, Inc., the founders emphasize their connections in the world of coffee, particularly growers that use sustainable practices. They can get good prices for bulk beans that they can brand with their own label. The founders also have experience in making and understanding coffee and the business. One of them has an MBA, and can leverage the executive ability. Both have worked in marketing departments in the past, and have social media experience, so they can highlight their expertise.
5. Sales Strategies
How will you raise money with your business and make profits a reality? You answer this question with your sales strategy. This section is all about explaining your price strategy and describing the relationship between your price point and everything else at the company.
You should also detail the promotional strategies you’re using now, along with strategies you hope to implement later. This includes your social media efforts and how you use press releases and other appearances to help raise your brand awareness and encourage people to buy or sign up for your products or services.
Your sales strategy section should include information on your web development efforts and your search engine optimization plan. You want to show that you’ve thought about this, and you’re ready to implement a plan to ramp up sales.
Coffee House needs to make sure they utilize word of mouth and geolocation strategies for their marketing. Social media is a good start, including making Facebook Live videos of them demonstrating products and how to grind beans. They can encourage customers to check in when visiting, as well as offer special coupons and promotions that activate when they come to the house to encourage sales.
6. Funding Requirements
Here’s where you ask for the amount of money you need. Make sure you are being as realistic as possible. You can create a range of numbers if you don’t want to try to pinpoint an exact number. Include information for a best-case scenario and a worst-case scenario. You should also put together a timeline so your potential funders have an idea of what to expect.
It can cost between $200,000 and $500,000 to open a coffee house, and profit margins can be between 7 and 25 percent, depending on costs. A well-run coffee house can see revenues of as much as $1 million a year by the third year, according to the Chronicle. Some of the things Coffee House, Inc., would include in its timeline are getting premises, food handlers’ permits and the proper licenses, arrange for regular supply and get the right insurance. How long these items take depend on state and local regulations. No matter your business, get an idea of what steps you need to take to make it happen and how long they typically take. Add it all into your timeline.
7. Financial Projections
Finally, the last section of your business plan should include financial projections. Make sure you summarize any successes up to this point. This is especially important if you hope to secure funds for expansion of your existing business.
Your forward-looking projections should be based on information about your revenue growth and market trends. You want to be able to use information about what’s happening, combined with your sales strategies, to create realistic projections that let others know when they can expect to see returns.
Even though it can be time-consuming to create a business plan, your efforts will be rewarded. The process is valuable for helping you identify potential problems, as well as help you plan ahead. You’ll be more organized and better prepared for success.