If you’re starting a business, one thing
you’ll need to do early on is to write a business plan.
But it can be hard to know where to start.
You can find plenty of business
plan templates online, but filling them out can still be tough. What
information should you include? How much detail should you go into? What are
the essential ingredients for a successful business plan?
In this tutorial, I’ll answer all those
questions for you. I’ll take you through what a business plan is and why you
should write one, and then we’ll look in detail at each of the sections of a
business plan.
Whether you’re working from a template or
staring at a blank sheet of paper, by the end of this tutorial you’ll know
exactly how to proceed and will feel confident in your ability to create an
effective business plan.
1. What Is a Business Plan?
Let’s start with the basics and settle on a
basic definition of a business plan.
The U.S. Small Business
Administration gives a pretty good description:
A
business plan is an essential roadmap for business success. This living
document generally projects 3-5 years ahead and outlines the route a company
intends to take to grow revenues.
Notice that the definition doesn’t include
anything about the format of the business plan, the length, the detailed
contents, or the intended audience. All of those things can vary widely, so
although we’ll look at some common approaches in this tutorial, there’s always
scope for you to do it differently.
The important thing is that you create a
“roadmap for business success”, looking into the future and planning how your
company will grow.
Also notice that it’s a “living document”,
so don’t feel pressured into thinking that you need to have all the answers
right now. It’s designed to grow and change with your business, so this is not
a single, perfect document, but the first draft of many. I’ll cover updating
your business plan in the final section.
2. Why Write a Business Plan?
You may be reading this tutorial because
you’ve been told to create a business plan. If you’re trying to raise funds for
your business or to attract investors, a business plan is often a requirement.
A bank, for example, won’t want to lend you
money without first getting a detailed understanding of how your business
works, how it fits into the competitive landscape, and how you plan to generate
the profits that will enable you to pay that money back in future.
The same goes for angel investors, venture
capitalists, or other people who may be thinking of investing in your business.
So a business plan is often a key component
of a package you put together when you’re seeking funding. For more on this
process, see the following tutorials:
Finance
Borrowing Money to Fund a Business
Andrew Blackman
Finance
How Angel Investors Can Fund Your Business
Andrew Blackman
Finance
How to Raise Money From Venture Capitalists
Andrew Blackman
Finance
How to Craft a VC-Ready Pitch Deck
Eddie Earnest
But that’s not the only reason to write a
business plan. Even if there’s no external requirement to write one, it’s still
an essential component of starting a company with solid foundations.
In a recent tutorial, I went through a
comprehensive, step-by-step
guide to starting a business, and writing a business plan came early on, as
step 3. To me, it just makes sense.
As Benjamin Franklin said:
“If you fail to plan, you are planning to
fail.”
Making a plan is a basic step that you
should take before any major activity. Writing a business plan may be a painful
process, but it forces you to think through your strategy and get clear about
key things like your value proposition, your target customers, your financial
plan, and so on. Better to struggle with those things now than to have your
business suffer from lack of clarity.
You’ll find some articles suggesting that
business plans are outdated, particularly in today’s fast-moving, ever-changing
world. But remember the SBA’s definition of a business plan as a “roadmap for
success”. Having a map doesn’t commit you to following one particular route. In
your business journey, you’ll probably end up getting diverted, taking
shortcuts, trying to dodge traffic, and maybe even making the odd U-turn. In a
world of change, having a map becomes even more
important.
So be ready to change your business plan as
you go, and certainly don’t feel constrained by it. But having a plan, even a
provisional one, will help you to make sure that your business idea makes
sense, that you have thought through all the problems you could face, and that
you are ready to make the significant investment of time and money that
a business entails.
Bottom line: You plan your vacation, so you
should definitely plan something as important as your business.
3. What Makes a Good Business Plan?
So what makes for an effective business plan?
It depends on your audience: whether you’re writing it for yourself, or for
potential investors, lenders or business partners.
External Audience
If you’re writing a plan to convince people
to lend money or invest in your business, then your plan will need to accomplish
a few things:
Have a compelling executive
summary that clearly explains your business idea and gets people hooked on its
potential.
Include enough detail to enable
the reader to understand your products/services and what makes them special.
Show what’s different about
your company and what advantage it has over competitors.
Demonstrate a clear strategy
for winning new customers and increasing revenue each year.
Include a solid financial plan
with realistic growth projections.
For an external audience, presentation is
also very important. You’ll be judged primarily on the content, of course, but
we’re all affected by how something looks, aren’t we? If you visit a website
and it has an amateurish, 1990s design, you’re less likely to click around than
you are when you find a polished, attractive site.
It’s just the same with business plans.
Focus on the content, but don’t neglect the design. If you use a
professional-looking business
plan template, you create a positive first impression, help your reader to
find the crucial information quickly, and make reading your plan a pleasant
experience.
There’s no prescribed length for a business
plan—it depends on how complex your business is and how much detail you need to
go into. As a general guide, if you aim for 15 to 20 pages you’ll be on the right
track. But if you’ve communicated all the important points in five pages,
please don’t feel any need to pad it out; conversely, if you need more space,
that’s fine too.
Internal Audience
If you’re writing a business plan for your
own benefit, then of course the format is less important. It’s more about
capturing the essential information you need to understand your business and
how it will grow.
For example, the founders of My Possibilities, an organization
providing continuing education for adults with disabilities, wrote their
initial business plan on
a Starbucks napkin.
As we’ll discover later, a good business
plan is a living document anyway, so you can (and should) go back to it later and enhance it. So it may start on a napkin or in a simple Word document, and then evolve from there later on.
Most of the points I described above still
apply for an internal business plan. It’s just that the purpose changes; it’s
not about convincing other people that your business has a bright future, but
about getting clear for yourself on what that future looks like and how you’ll
get there.
So it’s still good practice to include an
executive summary, for example. You may think you don’t need one, but you’ll
find that the exercise of boiling your business idea down to a brief “elevator
pitch” gives you much greater clarity. It will also help you talk about your
business and promote it when you come across networking opportunities.
Likewise, you’ll still want to describe
your products/services, your competitive advantage, and your strategy for winning
new customers. And a solid financial plan showing how you plan to grow is an
absolute must.
In the following section, I’ll go through
the key components of a business plan. These sections are important to include
if you’re creating a formal plan for an external audience, but if you’re
writing it just for yourself, you have some more flexibility.
I’d still recommend going through all of
them and including them in some form, but you can adapt the document to your
own needs. As long as you answer the most important questions, like what’s
unique about your business and how it will attract customers, you can follow
whichever format makes the most sense for your company.
For more on creating flexible business
plans like this, see the following tutorials:
Business & Finance
Business Plans for Freelance Consultants
Will Kenny
Entrepreneurship
A Fluid Business Plan Template for Your Microbusiness
Skellie
4. Key Components of a Business Plan
So we’ve looked at why you should write a
business plan and what makes a good business plan. Now it’s time to get more
specific about the contents.
So now I’ll list the main sections you
should include, and tell you how to approach each section. These are the seven
sections recommended by the National
Federation of Independent Business, but you’ll also find other sources,
such as the U.S. Small
Business Administration, making very similar suggestions.
Of course, you can vary this depending on
your own situation. For example, if you’re running a tech firm and presenting
your plan to a technically-literate audience, you may want to include a section
providing more detail on the technology and how it works. But the following general
guide will work for most businesses.
Executive Summary
If you’re looking for funding, this could
be the only section that potential lenders or investors read. If this section
convinces them that your company has potential, they’ll read more; if not, your
beautifully printed plan with all its glossy charts and images is destined for
the recycle bin.
By the way, I’m listing the Executive
Summary first because it appears at the beginning of the document, but you may
want to write it after completing the rest of the plan, or at least come back
to it then and modify it. As you’ll see, a lot of the content draws from what
you’ve written in other sections of the plan.
Your executive summary should start with an
ultra-short description of your company. In a single sentence, or at most a
short paragraph, describe what you do and why you do it. Keep it simple, and
avoid jargon.
This can be a surprisingly difficult thing
to do. As an entrepreneur you’re probably full of enthusiasm about all the
different things your company does, and condensing it all into a single
sentence is tricky.
Here’s a useful trick: go to a search
engine and type in the names of some of your favourite companies. Then look at
the snippet of text that appears underneath the company’s name in the search
results. It serves a slightly different purpose, but it can be a good, quick
way to see how companies self-identify in a very limited space.
If you go to Google.com and search for
“Apple”, for example, the text snippet is:
Apple leads
the world in innovation with iPhone, iPad, Mac, Apple Watch, iOS, OS X, watchOS and more.
For Envato, the company that runs this
site, the text is:
Envato is
an ecosystem of sites that help people be creative.
After you’ve crafted a good, pithy
description, the rest of the executive summary should be dedicated to
summarizing what you cover in the rest of the document. So you’ll want to go
through the rest of the sections and pull out the highlights.
And I mean the real highlights—aim to keep this section to a single page. Remember
that the purpose of the executive summary is to get people hooked on your
company and convince them to read more. Don’t include details—they’ll find
those later on.
Be specific, by all means, about the
big-picture things like the problem you solve, the strategy you follow, your
target customers and your top-level financial information. But keep strictly to
the big picture, and leave everything else for later.
If you’re writing the plan for a particular
purpose, for example to secure funding, then you should also use the executive
summary to tell people exactly what you want from them and why.
Company Description
This section is a high-level overview of
your company.
Wait, didn’t we just do that in the
executive summary? Yes, but this section is a little different. The executive
summary was like an initial elevator pitch for your company. The company
description gives information that is useful to your reader, but doesn’t fall
into the “attention-grabbing” category.
For example, this section often gives a
brief history of the company—when it was founded, where it’s located, and some
of the major milestones it’s reached so far. This wouldn’t be appropriate for
the executive summary, because it’s not going to convince anyone to read
further. But it is something that an investor or lender would want to know
about once they’ve decided to read on.
Similarly, you should mention the legal
structure of your business—whether you’re a sole proprietor, a limited
partnership, a corporation, or another form. For more on this, see the
following tutorial:
Planning
Which Legal Structure Is Right for Your Business?
Andrew Blackman
If your business has shops, offices or
other physical locations, mention those here too. And you can also give more
information on your products/services,
who your customers are, and what your goals are for attracting more customers
in future.
Remember that some of
this information will appear in the following sections, so don’t go into too
much detail or duplicate too much information—it’s fine to keep this section
quite short.
Products/Services
No matter what kind of
business you run, the bottom line is that you’re selling something. This
section is designed to give a clear description of exactly what you’re selling.
It’s a good idea to
approach this, however, from the point of view of a potential customer, rather
than from your own point of view as the producer. You may have packed all sorts
of cool features into your product, but what matters is how those features help your
customers solve a problem or have a great experience.
For example, if you
run a software company and your main product is a fitness app, don’t just list
the features of the app or the code you used to build it. Instead, pinpoint how
your app is different from the hundreds of other fitness apps on the market.
What new approach does it take? How will it improve the lives of the people who
buy it? What problem does it solve in a way your competitors don’t?
Whether you’re selling
products, services, or a mix of both, the same rule applies. Try to step
outside your company and see what matters to your customers. That, ultimately,
is what any investors or lenders will care about—and it’s what you should care
about too. Customers are the lifeblood of your business.
So if the company you
run is a design studio, think about how it’s different from all the others.
Maybe you serve a particular niche market, maybe you and your staff bring a
unique set of skills, or maybe you offer a broader range of add-on services.
Also think about where
your product fits in the product lifecycle. This is not a new concept, as you
can see from this 1965 Harvard
Business Review article, but it’s remained remarkably unchanged as other
business fads have come and gone. Here are the four stages that products go
through:
Market
development
Growth
Maturity
Decline
For some products,
like hi-tech gadgets, that lifecycle can be very fast; for more traditional
products, it can be much slower. Describe what stage your product is in and how
long you expect it to take to progress through the various stages.
And that leads on
naturally to the next question: When your current main product goes through its
natural lifecycle into decline and ultimately death, what else have you got in
the pipeline? Or what research are you doing to come up with those follow-up
products?
If you’re stuck for
ideas, try this tutorial:
Products
How to Create a Product Roadmap
Thursday Bram
One final thing: If
you hold any patents or other intellectual property, you should also mention
them in this section.
Market Analysis
Now that you’ve described what you’re
selling, you need to focus on who you’re selling it to.
The idea of the market analysis is to
describe your customers. Who are they, how many of them are there, and how many
can you expect to get?
That starts with the big picture: what
industry are you in, how big is that industry, and how fast is it growing?
Then define your target market: a smaller
segment of the overall customer base within your industry, to whom you plan to
sell your products or services.
You’ll need to do some market research for
this section, if you haven’t already. Try to get figures on how much money your
target market spends on your kinds of products and services. Run surveys to
find out what they’re looking for and whether your competitors’ offerings are
meeting their needs.
There’s a lot to do here, so for more
detail, see these tutorials:
Freelance
How to Identify Profitable Clients: A Step-by-Step Guide
Celine Roque
Freelance
How to Find Out Exactly What Your Target Clients Want—Then Sell It to Them
Celine Roque
Business Plans
How To Put 'The Business Model Canvas' To Good Use
Sven Lenaerts
Entrepreneurship
How to Get to Know Your Customers
David Masters
Then think about how much market share you
can expect to gain. This involves a lot of estimating, so be clear about the
assumptions you’re using and their justification.
Also describe your pricing strategy, and
how you fit into the competitive landscape. No matter how good your products or
services are, it’s likely that your competitors will have at least some
advantages over you, so be honest about those. List your strengths and
weaknesses, any problems you face, and how you will overcome them.
Strategy and Implementation
So we now know what you’re selling and who
you’re selling it to. The next step is to define how you’re going to build your
products, and how you’re going to reach all those potential clients.
In other words, what’s your strategy for
sales, marketing and operations?
For example, do you have a dedicated sales
force, or do you plan to hire one? How will you identify prospects, and how
will you approach them?
What’s your marketing
plan? How do you plan to position your products or services to convince people
to buy them? How will you advertise? Do you plan to use social media as a
marketing channel? If so, how?
This is another huge
area, but fortunately we have dozens of tutorials in our Marketing category
to help you, such as:
Marketing
Preparing Your Online Business For Marketing
Omar Zenhom
Marketing
Plan Multi-Content Marketing for Your New Online Business
Omar Zenhom
Marketing
Build Audience Share for Your New Online Business
Omar Zenhom
Email Marketing
How to Create an Email Marketing Plan
David Masters
Marketing
How to Systematize Your Online Marketing
David Masters
Bootstrapping
A Brief Introduction to Bootstrapping Your Marketing
David Masters
Marketing
The No-Nonsense Guide to Marketing Your Microbusiness
Skellie
For the operations
side, you don’t need to go into a huge amount of detail on the
behind-the-scenes workings of your business. Just give an overview of how
you’ll operate the business.
For products, this
could be a description of where you acquire supplies, how you build the
products, and how you distribute or deliver them. For services, you could
describe the process of delivering that service, from client acquisition
through to project definition, delivery and completion.
Organization and Management Team
This section is just
what it sounds like. Describe your company's organizational structure. Who owns
it, who manages it, and who are the key employees?
A simple organization
chart is useful here. But the most important thing is not really the names of
the departments or the people in charge. What matters is who those people are.
What skills and experience do they bring to the company?
That, after all, is a
key factor in the success of any business. Having the right people will help
you navigate the difficult road ahead. So take the time to profile each of your
key employees. Even if there aren’t many of them—or even if it’s just you—it’s
important to show that your team is qualified and competent. Focus particularly
on experience that’s relevant to the company, rather than just general
background.
Financial Plan and Projections
This final section gets down to the dollars
and cents. (Or insert the currency of your choice here!)
If you’re already in business, how much
money have you been making, and how do you expect that to change? If it’s a new
business, what are your forecasts for the next few years?
The information here needs to be quite
detailed. For the historical part, you’ll need to produce income statements,
balance sheets and cash flow statements year by year for the past five years
(or however long you’ve been in business).
For the projections, you’ll need to produce
the same statements based on your estimates for the next three years. You’ll
also need to justify those estimates by showing what they’re based on. Feel
free to use an appendix if it’s a lot of information.
You may need to hire an accountant to help
you prepare these statements, especially if the financial stuff doesn’t come
easily to you. But if you want to do it yourself, the following tutorials will
help you:
Accounting
Bookkeeping 101: What You Need to Know to Run Your Business
Andrew Blackman
Planning
From Idea to Break-Even: How to Create a Financial Model for Your Business
Andrew Blackman
Finance
How To Read an Income Statement
Andrew Blackman
Finance
How To Read a Balance Sheet
Andrew Blackman
Finance
How To Read a Cash Flow Statement
Andrew Blackman
5. How to Use Your Business Plan
Whether you’ve created your business plan
for an external audience or for your own purposes, it’s important that you
remember what we established right at the beginning: it’s a living document.
So even if you created it to apply for a
particular type of funding, don’t just discard it after your application has
been accepted or rejected. You’ve taken the time to create a comprehensive
strategic view of your business, so why not put it to good use?
Your business plan can be central to your
goal-setting and decision-making within the company for years to come. So
update it regularly, using whatever schedule makes most sense, but at a minimum
every year.
Your goals will change, and so will your
strategies and probably your products and services too, and that’s OK. It’s the
nature of being in business. Nothing stays the same for very long.
For more information, check out our planning tutorials
on Envato Tuts+, in particular the series David Masters wrote on Strategic
Planning for Your Microbusiness.
Conclusion
As you’ve seen in this tutorial, a business
plan is an essential document for any company. A well-written plan can
give you new insights and clarity on your business strategy—and if you’re applying
for loans or investment, it can help you secure the funds that will fuel your
growth.
You now know exactly what’s involved in
writing an effective business plan. You’ve seen the purpose of the plan and how
it can be used, and we’ve gone through the key components, section by section,
explaining how you should approach each one and what you should include.
Some of the sections, such as analyzing your
target market and coming up with a sales and marketing strategy, require quite
a bit of extra research. If you haven’t already done that work, I’d suggest
that you follow some of the links I included in those sections, so that you can
get more information on how to gather the necessary data.
Finally, if you want to see how the
business plan fits into the bigger picture of launching your new company, have
a look at my recent tutorial on How
to Start a Business.