Chapter 6. Writing a Business Plan
The Business Plan
A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it. For most new ventures, the business plan is a dual-purpose document that is used both inside and outside the firm. Inside the firm, the plan helps the company develop a "road map" to follow to execute its strategies and plans. Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it. The business plan must be substantive enough and have sufficient details about the merits of the new venture in order to convince the reader that the new business is exciting and should receive a support. Much of this detail is accumulated in the feasibility analysis stage of investigating the merits of a potential new venture.
Reasons for Writing a Business Plan
There are two primary reasons to write a business plan:
- Internal Reason → Forces the founding team to systematically think through every aspect of its new venture.
- External Reason → Communicates the merits of a new venture to outsiders, such as investors and bankers.
Who Reads the Business Plan⎯and What Are They Looking For?
There are two primary audiences for a firm's business plan:
A Firm's Employees
A clearly written business plan, one that articulates the vision and future plans of a firm, is important for both the management team and the rank-and-file employees. A clearly business plan also helps a firm's rank-and-file employees operate in sync and move forward in a consistent and purposeful manner. The existence of a business plan is particularly useful for the functional department heads of a young firm.
Investors and Other External Stakeholders
External stakeholders who are being recruited to join a firm, such as investors, potential business partners, and key employees, are the second audience for a business plan. To appeal to this group, the business plan must be realistic and not reflective of overconfidence on the firm's part. At the same time, the plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns greater than lower-risk investment alternatives. In addition, a business plan should disclose all resource limitations that the business must address before it is ready to start earning revenues.
Guidelines for Writing a Business Plan
There are several important guidelines that should influence the writing of a business plan. It is important to be sensitive to the structure, content, and style of a business plan before sending it to an investor or anyone else who may be involved with the new firm.
Structure of the Business Plan
To make the best impression, a business plan should follow a conventional structure. Typically, investors are very busy people and want a plan where they can easily find critical information. If an investor has to hunt for something because it is an unusual or just isn't there, he or she might simply give up and move on to the next plan.
Content of the Business Plan
The business plan should give clear and concise information on all the important aspects of the proposed new venture. It must be long enough to provide sufficient information, yet short enough to maintain reader interest. After a business plan is completed, it should be reviewed for spelling, grammar, and to make sure that no critical information has been omitted.
Style or Format of the Business Plan
The plan's appearance must be carefully thought out. It should look sharp but not give the impression that a lot of money was spent to produce it. There are three types of business plans, each of which has a different rule of thumb regarding length and level of detail.
- Summary Plan → A summary business plan is 10 to 15 pages and works best for new ventures in the early stages of development that want to "test the waters" to see if investors are interested in their idea.
- Full Business Plan → A full business plan is typically 25 to 35 pages long. This type of plan works best for new ventures that are at the point where they need funding or financing; serves as a "blueprint" for the company's operations.
- Operational Business Plan → An operational business plan is 40-100 pages. It is meant primarily for an internal audience and works best as a tool for creating a blueprint for a new venture's operations and providing guidance to operational managers.
A final guideline for writing a business plan is to recognize that the plan will usually change as it is being written and as the business evolves.
Outline of the Business Plan
Specific plans may vary, depending on the nature of the business and the personalities of the founding entrepreneurs.
Exploring Each Section of the Plan
Cover Page and Table of Contents
The cover page should include the company's name, address, and phone number; the date; the contact information for the lead entrepreneur; and the company's website address if it has one.
Executive Summary
The Executive Summary is a short overview of the entire business plan; it provides a busy reader with everything she needs to know about the venture's distinctive nature.
Industry Analysis
The main body of the business plan begins by describing the industry in which the firm intends to compete. This description should include data and information about various characteristics of the industry, such as size, growth rate, and sales projections.
Company Description
This section begins with a general description of the company. Although at first glance this section may seem less critical than others. It is extremely important in that it demonstrates to your reader that you know how to translate your idea into a business.
Market Analysis
The market analysis is distinctly different from the industry analysis. Whereas the industry analysis focuses on the industry in which a firm intends to compete (e.g., toy industry, fitness center industry, men's clothing industry), The market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal.
The Economics of the Business
This section begins the financial analysis of a business, which is further fleshed out in the financial projections. It addresses the basic logic of how profits are earned in the business and how many units of a business's product or service must be sold for the business to "break even" and then start earning a profit.
Marketing Plan
The marketing plan focuses on how the business will market and sell its product or service. It deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales.
Product (or Service) Design and Development Plan
If you're developing a completely new product or service, you need to include a section in your business plan focuses on the status of your development efforts.
Operations Plan
The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. It is best to keep this section short and crisp.
Management Team and Company Structure
Many investors and others who read business plans look first at the executive summary and then go directly to the management team section to assess the strength of the people starting the firm. The management team of a new firm typically consists of the founder or founders and a handful of key management personnel. A brief profile of each member of the management team should be provided. Each profile should include the following information:
- Title of the position
- Duties and responsibilities of the position
- Previous industry and related experience
- Previous successes
- Educational background
Any material that doesn't easily fit into the body of a business plan should appear in an appendix⎯résumés of the top management team, photos or diagrams of product prototypes, certain financial data, and market research projections.
Putting It All Together
In evaluating and reviewing the completed business plan, the writers should put themselves in the reader's shoes to determine if the most important questions about the viability of their business venture have answered.
Presenting the Business Plan to Investors
If the business plan successfully elicits the interest of a potential investor, the next step is to meet with the investor and present the plan in person. Because investors ultimately fund only a few ventures, the founders of a new firm should make as positive an impression on the investor as possible.
The Oral Presentation of a Business Plan
The founders of a new venture should prepare a set of PowerPoint slides that will fill the time slot allowed for the presentation portion of the meeting. The first rule in making an oral presentation is to follow instructions. The presentation should be smooth and well-rehearsed. The slides should be sharp and not cluttered with material.
Questions and Feedback to Expect from Inventors
The smart entrepreneur has a solid idea of what to expect and is prepared for these queries. Because investors often come across as being very critical, it is easy for an entrepreneur to become discouraged, particularly if the investor seems to be poking holes in every aspect of the business plan. The question-and-answer period is extremely important. Here inventors are typically looking for how well entrepreneurs think on their feet and how knowledgeable they are about the business venture.
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