Many enthusiastic entrepreneurs forget to lay the groundwork for their business and head straight to the action. But how can you expect to succeed without a proper business plan?
The extent to which you plan for the growth of your company determines how well you can grow and how insulated you'll be from threats and competitive pressures in the future. Companies with a plan are less likely to fall victim to common startup problems like a lack of cash flow and low employee productivity. The right plan helps ensure you can successfully grow your business.
Here you will learn the following:
- What business plans really are
- What to include in your business plan
- The four benefits of creating a business plan
- Tips to create a compelling business plan
- How to use your business plan to raise funding
What are business plans?
Business plans are documents that outline the scope and strategy of a new or existing business. Essentially, they are blueprints that provide a step-by-step account of your business's goals and how you plan to achieve them.
There are 10 key elements of a business plan:
- Executive summary – This section gives a brief overview of the entire business plan.
- Company overview – Here, management explains the genesis of the company with information such as where the company was incorporated and milestones achieved to date.
- Industry analysis – In this section, you give an overview of the industry or market in which you compete. Answer questions such as the size of the market and trends that affect it or might in the future.
- Customer analysis – The customer analysis section of your plan details your target customers. It identifies how many target customers you have and their psychographic and demographic profiles.
- Competitor analysis – This section of your plan identifies your direct and indirect competitors. It explains their strengths and weaknesses and documents the areas in which you have competitive advantage.
- Marketing plan – Here, you lay out your company's marketing and promotions strategy. You should also include a list of the key products or services that your company sells or intends to sell.
- Operations strategy – Here, you will state your short- and long-term goals and your key milestones en route to achieving them.
- Financials – This section forecasts your company's income statements, balance sheets and cash flow statements for the next five years.
- Management team – In this section, you will provide the bios of the founder(s) and key employees.
- Appendix – Finally, you will include any additional information that supports the rest of your business plan, such as customer lists, store designs or employee agreements.
Benefits of creating a business plan
There are multiple benefits of creating a business plan. These are the key ones.
1. Understanding your market
Creating your business plan forces you to really understand your market. In researching your industry, customers and competition, you will fully diagnose your marketplace. Ideally, this market research will alert you to trends and opportunities you can target that competitors are ignoring.
2. Attracting funding
A business plan is a vital tool to attract funding from investors or lenders. Both investors and lenders want to see a well-reasoned business plan. Such a plan gives your company credibility and allows the investor to gauge their potential return on investment.
3. Tracking your business's progress
When creating your plan, you'll identify milestones and financial goals and objectives for your company. With proper business planning, you gain a guide to help you track the progress of the business. Revisit your business plan monthly, or at least annually, to track your progress and/or modify your plan.
4. Attracting others to your cause
The right business plan can get employees, partners, advisors or others to join your company. If you can present an inspiring vision in your plan, the sky is the limit to what you can achieve.
Tips to create the most compelling business plans
Here are some tips for creating a great business plan:
- Don't skimp on the research. Researching your industry, customers and competitors can make you a true expert on your market. The insight you gain can enable you to become a prominent player in your space.
- Create realistic financials. The right financial model will allow you to test different assumptions. For example, you can see the implications of growing at 10% versus a 20% rate. Try to root your assumptions in reality as much as possible. For example, if no company has ever grown to $1 billion in revenues within one year, don't claim that you'll be the first.
- Document your milestones. I prefer setting quarterly milestones for the first year and then annual milestones for the next four years. Milestones can be hitting sales goals, launching new products or locations, hiring key employees, etc.
- Don't try to answer every imaginable question in your business plan. Your business plan should be 15 to 20 pages in length and answer most questions. But before writing you a check, investors and lenders will want to meet with you. During those meetings, you'll have the opportunity to answer any additional questions they have.
How to use your business plan to raise funding
Most entrepreneurs and business owners create plans in order to raise funding. Upon completion of business plans, the three most common funding sources are banks, angel investors and venture capital firms.
Banks provide loans, which the entrepreneur must pay back with interest. Conversely, angel investors and venture capital firms are equity investors. They provide money in return for shares in your company. This has a big cash flow benefit in that you need to pay back neither the interest nor the principal. If and when you sell your company, though, a percentage of the proceeds will go to the investor and not you.
Banks are simple to find. In most cases, you should approach banks located within a few miles of your company. Banks will judge your business plan with an eye for whether you will be able to repay the loan's interest and principal.
Angel investors are much harder to identify than banks. While some angel investors work together in networks (which are easy to find), most angels are successful individuals who don't tell the world they are angel investors. Rather, they are doctors, lawyers, executives, business owners and others who have the means to invest in private companies occasionally. To find them, network with lawyers, accountants and other professionals. Angel investors typically invest within 50 miles of their homes, so, once again, think local here. Individual angel investors commonly write checks between $25,000 and $100,000. If you are looking to raise more funding than that, you will need to find multiple angel investors.
Venture capital firms
Venture capital firms are easy to find online, but they are the most difficult source of capital to obtain. This is because they receive so many business plans and thus are highly selective. In fact, when you read about how selective universities like Stanford or Harvard are, they pale in comparison to venture capital firms, which fund well under 1% of the companies they see.
Venture capital firms want to see the potential for your company to earn them up to a tenfold return. That means that if they give you $5 million, they want to see the ability for you to grow to a $100 million company (and if you sold at that amount, they could receive $50 million and the remaining $50 million would go to you). In most cases, venture capital firms don't write checks for less than $2 million. They also want to see business traction, such as existing customers. So, in most cases, companies raise angel funding first, achieve traction, and then raise funding from venture capital firms.
Whether you seek funding from banks, angel investors or venture capital firms, you will submit your business plan. If the recipient denies your request for funding, solicit their feedback as to why. If you constantly hear the same reply, modify your strategy and/or business plan to adhere to the wants of these investors.
A compelling business plan can help you raise the growth capital you need and put you on the right track to build a highly successful company. Whether you're a startup or established company, create or revisit your business plan today.