Business Plan Basics
A good business plan has two goals: It should describe the fundamentals of your business idea and provide financial data to show that you will make good money. Beyond that, the content of your business plan depends on whether it’s for potential investors or a financial projection just for yourself.
How Will You Use Your Business Plan?
Depending on whether you're trying to attract investors or are creating a blueprint for your own use, a business plan can take somewhat different forms.
If you will use your business plan to borrow money or interest investors, you should carefully design your plan so that it sells your vision to skeptical people. Normally this means your business plan should include:
- a persuasive introduction and request for funds
- a statement of the purpose of your business
- a detailed description of how the business will work (including what your product or service will be, whether you'll have employees, who will supply your goods, and where you will be located)
- an analysis of your market (who your customers are)
- an evaluation of your main competitors
- a description of your marketing strategy (how your business will reach plenty of customers and fend off your competitors)
- a résumé setting forth your business accomplishments, and
- detailed financial information, including your best estimates of start-up costs, revenues and expenses, and your ability to make a profit.
Together, all the parts of your plan should reveal the beauty of your business idea. You want to show potential lenders, investors, or people you want to work with that you've hit upon a product or service that customers really want. In addition, you should prove that you are exactly the right person to make your fine idea a roaring success.
Funding the Venture Yourself
If you're not looking for outside money, your financial projections will be the most important part of your business plan. These projections will tell you the cost of your products or services, the amount of sales revenue and profit you can anticipate, and, perhaps most importantly, how much you'll have to invest or borrow to get your business off the ground.
Because you won't use your plan to ask for money, you can create an informal business plan that omits some of the elements listed above. For example, you don't need to worry so much about making a sales pitch or a slick presentation, and you may decide to skip the résumé of your own business accomplishments, but think twice before leaving out too much. Any new business will need to introduce itself to people -- for example, suppliers, contractors, employees, and key customers -- and showing them part or all of your business plan can be a great way to do it.
Forecasting the finances of your business may seem intimidating or difficult, but in reality it's not so bad. Good planning consists of making educated guesses as to how much money you'll take in and how much you'll need to spend -- and then using these estimates to calculate whether your business will be profitable. Here are the financial projections you should make:
- A break-even analysis. Here you'll use income and expense estimates to determine whether, in theory at least, your business will bring in enough money to meet its costs.
- A profit-and-loss forecast. Next, you'll refine the sales and expense estimates that you used for your break-even analysis into a formal, month-by-month projection of your business's profit for the first year of operations.
- A cash flow projection. Even if your profit-and-loss forecast tells you that your business will have higher revenues than expenses -- in other words, that it will be profitable -- those numbers won't tell you if you'll have enough cash on hand from month to month to pay your rent or buy more inventory. A cash-flow projection shows how much money you'll have -- or how much you'll be short -- each month. This lets you know if you'll need a credit line or other arrangement to cover periodic shortfalls.
- A start-up cost estimate. This is simply the total of all the expenses you'll incur before your business opens. If you need to pay off these costs during the first year or two of business, they should be included in your month-to-month cash-flow projection.
Again, no matter who your audience is, you should be as thorough as possible when calculating your break-even analysis and profit-and-loss forecast. The last thing you want is to experience the very real misery of starting a business that never had a chance to make a solid profit.
Getting Started on Your Business Plan
Your best bet is to follow a self-help business plan book that shows you how to conduct the financial forecasts described above. Two good bets are Business Plan Pro, by Palo Alto Software, and How to Write a Business Plan, by Mike McKeever (Nolo).