Before you think I am going to give you the usual five steps ‘to a great business plan’ rundown, let me just say, that’s not going to happen here. Cookie cutter business plans are for wannabe entrepreneurs and whenever one comes across my desk, it always gets trashed.
A business is supposed to be innovative. So why on earth would you want to make a cookie cutter business plan? It’s just a terrible way to start things off.
If you’re serious about your business idea, then get comfortable because this article will take you ten minutes to read and I guarantee it will provide everything you need to know to put together a world-class business plan. If you’re looking for a quick way to slap together a business plan, perhaps being an entrepreneur isn’t right for you anyway…the road to riches starts with a well-thought-out plan.
Why My Opinion Matters
I’ve spent the majority of my entrepreneurial life reviewing business plans/models and deciding whether or not I want to invest in companies based on their plan. Needless to say, I take this stuff very seriously as my money and reputation depends on accurate analysis. So, analyzing and improving business plans is a big part of what I do for a living.
Separating The Herd
The reason why every VC, Private Equity or other funding source asks for a business plan is to be able to separate the real entrepreneur from those who have no clue. Most VCs worth their salt can look at a business plan and inside of five minutes know the mind of the entrepreneur who wrote it.
The second reason they want a business plan is to see if the principals have thought the idea through. A business plan is not something you put together at the point you want to go for funding. A business plan starts from that napkin you scribbled on the first time you had an idea, then it evolved from there looking at every question and testing every hypothesis and seeking the answers to it.
A solid business plan worthy of VC money is the product of countless hours of brainstorming and answering tough questions related to the concept, its value-add to customers, its customer profile, the competition it will face and how it will overcome that competition.
In this piece I want to teach you how to think of your business with an unbiased view and learn to make a plan that proves you have looked at it from every possible angle. That is the foundation of all successful business plans. Preparation is the key to success in business – and it starts with your plan!
The Basics of A Business Plan
Your business plan is designed for one person – you. With that said, it needs to be bulletproof so that if you were to present it to bankers, potential investors or stakeholders, it would impress and be able to answer any speculative doubt. As such, it is the central document to your venture. It is an iterative document that must be forethought, written and edited constantly as you go through different stages of the business cycle.
This business plan that I am about to reveal is modular – in the sense that you can pull it out in sections and use it as opportunities present themselves. For instance, Section 1 can be used as the Executive Summary and it is used when you first meet a bank officer for a loan or an analyst at a venture capital firm. They want something quick to read before having to plough through a full-scale plan.
Sometimes your supplier/financier may ask for a Marketing Plan; this is when you pull out Section 4, below, and give them that. Of course, the entire business plan should be read in unison, but it’s built in modular and iterative fashion as a living document. So it works strategically in parts and holistically, together.
The first thing you need to write a kick ass business plan is a good mind mapping application. There are a few out there that are adequately powerful for use. Don’t bother with business plan templates as those are very rigid and will probably send you running in circles – not to mention that they are the definition of cookie cutter!
On your computer, have the mind mapping application open, as well as your word processor and your spreadsheet. With these tools, you are now ready to get started. Everything about your business and what you have to consider and do are spread over the seven sections as seen in the diagram.
SECTION 1 – Executive Summary
Business Description – Elevator Pitch
The first question you need to answer to get the business plan started is this:
“What value am I adding to the customer/marketplace I intend to attract?”
If you don’t know the answer to this question right away, you’d better think of a new business idea.
That is your central, most focused question and from here everything else will flow. Every question from here on will incrementally add layer after layer to your business plan. The first part of this question needs to be parsed into a few elements. The answer to this question will also evolve as you write this business plan – be prepared for that. The process of writing the business plan will focus your purpose and vision more than you can imagine. And it can be a very sobering process.
So first off, what value will your business provide? What void in society are you filling? What makes your product special?
Second, who is your target demographic?
When you answer the first two groups of questions, what you get is a broad description of your entire endeavor and your entire business plan stands on this. This is also your elevator pitch.
If you cannot condense your entire business idea into one concise sentence that takes no longer than 10 seconds to communicate (and answers the above questions), then you’re not going to get anyone’s attention, realistically. The rest of your business plan is an expansion of your elevator pitch, with all the details and all the analysis.
This introduction will go through numerous revisions. There are two kinds of revisions for the introduction. The first is changes in verbiage to smoothen the delivery (in other words, perfect the pitch). The second is the changes that are made throughout the growth of the business. One relates to form, the other, function.
SECTION 2 – Product Description
Once you have your elevator pitch mentioned up front, it’s time to delve into the details of the product/service. Here is where you describe dimensions, value add, models and details about the product itself. This is where most wannabe entrepreneurs fail. If it is a service, you would detail the scope of the service. Everything you write here should give the reader the impression that nothing is left to the imagination as far as the product or service is concerned.
When writing this section out, keep in mind the people who will be reading (technical people). And to them, you need to describe clearly what it is the company does. This part of the business plan will be consistent with any internal document describing the product. If there are patents involved, this would be a good spot to include that. Photographs, artist impressions, technical drawings should all come in this section.
Now that readers of your business plan have an idea of what to expect with your product or service, it’s time for you to turn their attention to the description of your typical customer. Most people say that they want to sell it to everybody. Yes, of course, that’s ideal. However, it is unrealistic.
To be able to optimize your efforts, you should define your primary market – those who like your main product, then identify subsets of your secondary market – those who like your product with minor variations. Think of it this way; if you’re selling a new, clear soda, then your primary market is the demographic that will be in the market for that clear soda (requires research of course – target cities, countries, age groups etc.). A variation is a slightly different market that likes fruit flavored sodas.
Not all target markets are defined similarly and not all market profiles can be sketched out of only logic and reasoning. Especially when it comes to personal taste and preferences, you may have to do market studies to determine what your primary target market is going to be. But for starters, sound logic and reasoning will do. Additionally, there is a lot of information from government statistical departments available online where you can learn about different demographics.
There is a lot of research that must go into preparing a great business plan and the first step is understanding your target market, inside and out.
Describe the target customer. Tell your audience as much as you can about this target customer you are selling to. Depending on your target
market the specifics will differ. If you are selling hair products, then maybe you need to include the number of blondes in a certain demographic. That statistic will be pointless if you are selling Insurance, let’s say. So choose the demographics that pertain to your product then describe them (i.e. are they single, married, married with children, students, unemployed, wealthy, conservative, liberal, gay, straight, whatever).
Funders and managers need to know this information for two reasons. First, funders need to verify, using spreadsheet models, the size and activity of the target market. If you can clearly identify this market it makes their analysis, and yours, easier and more accurate. And they respect you for it.
Size of Target Market
Once you have an idea of your target customer, you will be able to estimate the size and scope of your target market. For instance, if your profile is everyone who is between 21 and 25 years of age living in the state of New York, then your target market size is 589,000. By defining your target profile accurately, you can see how your decision making process gets clearly defined. If indeed your product appeals to such a wide market then this number can be used to estimate your gross income, otherwise, you would need to narrow this down appropriately. Your business plan must list this target market and the rationalization narrative of why this number applies to your potential market (be specific).
Review Section 2
What we have to this point is a description of the product, the target market that the product is directed at and the size of that target market. This section describes the inherent facts about your business. Everything is grounded in fact up to this point.
Most of the data from section 2 would be able to populate the SWOT analysis (Strength, Weakness, Opportunities, Threat). As you write the above sections of your business plan, have a second file open where you list out the strengths of the product as well as the inherent weaknesses. Strengths and weaknesses are usually internal issues within the realm of the product or the company. The opportunities for the product can be found in the target market profile and the size of the target market. Threats are not fully apparent yet in section two, but they will be as you move on to the next section. There will also be other strengths and weaknesses that surface as well as other opportunities as you progress through the business plan. We cover a wide-array of SWOT analyses every month here at Capitalist Creations. I encourage you to click here to review real life SWOT analyses we’ve completed on successful startups.
SECTION 3 – Industry
List out the size of the industry which you plan to enter and detail all the market players that occupy this industry. List them all out in terms of market share. This information is similar to your target market listed in Section 2. The difference is that the target market identified the potential of your entire market and their description. The industry describes who is currently servicing the market. It is a profile of all your competitors. This is the ecosystem.
In this section your challenge is to list the market share growth of all your competitors and see who is rising, and who is declining, and how everyone is differentiating their products. Construct a matrix that gives you a snap shot of the market players and how the total market is progressing. If you are a new market entrant, you will have to decide where your entry point in the ecosystem is. You are looking for holes in the competition’s game.
In your business plan, illustrate your target market share for the first, second and third year, then show an increase in annual terms thereafter. For instance, you could state that in your first year on the market, you plan to conquer 5% market share.
There are two ways you can justify this. First you could either state that you want to provide a price advantage and attack the entire market. Or, second, you could identify a weak company within the competitor list and lay assault to them in your business plan. There are other ways of market entry based on what product you offer and what market you participate in; whichever it is, this is the section where you would justify your point of entry – which often has a lot to do with timing, so clearly document why the time is now.
Once you identify your point of entry, the competitors who occupy that particular niche become your immediate competitors and deserve to be studied closely. Let’s say you were selling bicycles to men in New York between the ages of 21 and 25. In that market, there are 4 competitors, one who has 50% market share and the rest have 25%, 15% and 10%. If you chose to displace the one with 10% market share on a price strategy, then the rest of your business plan must be a cost-based strategy and a pricing strategy. In other words, in this business plan, everything must flow together and transition properly.
Every business has competition. A business plan is a forum for you to raise the issue of competition, then deal with it. This has two consequences. First, it forces you to research the competition and understand what the playing field is like. Understanding the competition and the way they are structured prepares you for how to deal with a market. Whether you are entering a new market where you are the innovator, or you are entering an existing market, there will always be competition at some point and you must be able to meet that challenge.
When writing the business plan, once you have described the industry and the players within that ecosystem, you need to highlight the market entry strategy, or if you are already established, you highlight how to expand your market. Market penetration has a lot to do with understanding the industry, the competitive forces and figuring what your competitive advantages are. If you have a significant cost advantage because you can now make a widget at a fraction of your competitor’s cost, you will enter the market on a pricing strategy. Slash the prices, make a profit and edge your competition out. This is an example of a competitive advantage that is used for market penetration (the entire Chinese economy was built on this advantage).
Your business plan must delineate your market penetration strategy and once you have wrested the targeted market, you must mention how you will defend it, moving forward. This part of the plan to wrest the market then defend it will be the subject of the next section, the Marketing Plan.
SECTION 4 – Marketing Plan
The Marketing Plan is the enumeration of the marketing strategy. It is built upon the strengths, weakness, opportunities and threats of a company (SWOT analysis) and seeks to match internal and inherent strengths with external and uncontrollable opportunities and threats. The marketing plan is not just the avenue of sales but a way to communicate with the market across all the noise and clutter. This is an important blueprint and as such it should be comprehensive as well as intricately linked to the industry and ecosystem data in Section 3.
Within the Marketing Plan, include a review of the information you gave in Section 3 to provide a context for the plan. Divide the Marketing Plan into five sections – the five P’s of marketing: Product, Price, Promotion, Placement, Process.
Product is a description of the full range of the product line and which market it is meant to address. This information has been presented in an earlier part but here you will match the product to the market so that the reader will understand the fit.
Your pricing strategy will address how you price your product. Costing is done in Section 5. So here all you have to do is explain how you will price your product in different markets, what your strategy is and how you will alter pricing in the future. Think of pricing here as demand driven pricing versus cost-plus. The reason you are not going to look at cost-plus here is because you develop price based on what the market will bear and your penetration strategies as well as your long-term branding. If you do cost-plus pricing here, you could lose out on maximizing revenue.
* In simple terms, cost-plus pricing is done by determining the cost to produce a product and then adding a margin to it.
Placement refers to how you plan to place your product. It is the branding you will employ. It is possible to have different branding for the same core product. For instance, Toyotas are well known to serve the middle income market. Its branding was firm. To enter the high end market, the company decided to create another brand, Lexus. With different branding they could charge differently and cater to a separate market. It also allows for placement of regionally appropriate branding.
This is where you conduct the entire forward facing communication with the customer: Advertisement, Infomercials, Commercials, Web Optimizations – everything that is meant to communicate and convince the target customer. This part of the business plan should have a detailed layout of how you will reach each target market and how this ties in with the remainder of your strategy. This section will require a significant amount of research and should not be taken lightly.
The last of the items in your Marketing Plan section is the feedback loop that surrounds the entire marketing process. It begins at the market testing phase where you survey the market. It continues through to the retail feedback and customer after sales service phase. All the while, you are constantly opening up to what the customer thinks of your product. Customer feedback is vital to the long-term success of a product and is commonly used (with great success) in the financial industry to improve customer experience and margins.
Social Media Strategy
In the last few years, Twitter and Facebook particularly have become tools that you can use to tap into customer intelligence. More so than Facebook, Twitter is one of the best ways to conduct market intelligence in real time, but they are both great in building brand awareness.
Facebook is a great marketing tool to get your campaign viral by word of mouth. Do include a section in your Marketing Plan that thoroughly addresses this channel. I have built successful Facebook campaigns for clients and my own online businesses which helped jumpstart our brand right out of the gates. Increasing your Facebook followers is very important in helping get the word out on your product. If you are willing to allocate a small budget (and I highly recommend it) to increasing your online presence via social media, it will make a world of difference provided you target your demographic properly. I’ve built Facebook followings quickly and for as little as $0.09 to $0.12 per like. These fans have been some of the best ambassadors for businesses I’ve helped. Email [email protected] for our free E-book on how to build your own Facebook Tribe (subject should read ‘Facebook Tribe E-book’).
The demographic you plan to target with your product should dictate which social media outlets you focus on. With the wide array of social media networks now, certain platforms appeal to certain demographics (i.e. Pinterest is great for targeting female fashionistas).
SECTION 5 – Financial Model
The Financial Model is a section that is modular in the overall business plan. In the event a banker or VC wants to see the ‘numbers’ this is the section you pull out and send over. The financial plan basically takes the entire narrative you’ve done thus far and converts it into a quantifiable spreadsheet. There are four subsections here: Costing, Revenue Model, Pro forma statements and Sensitivity Models. Let’s break them down so you understand what they are all about…
Here is the first of the spreadsheets you should do. The costing sheet is mostly a sheet where you have all your cost components easily entered. Keep the units uniform so that you can link them into other spread sheets to conduct sensitivity analysis. It would be best to have one spreadsheet file for all the financial issues of this section. In the file have one tab for costing then that can be linked to the other tabs for Revenue, Pro Forma and Sensitivity models.
There are two parts to the costing. First is the one above, where it looks at the cost of raw materials and fixed costs of plant and machinery. The second part looks at all other costs, from expansion to tax rates and exchange rate considerations as well even salaries and insurance; basically everything that goes out.
The revenue model should focus on the projections of each market and each product or SKU. They are then consolidated to a single line item and spread across individual months for the first five years, then annually after that. The spreadsheets should be scalable and you should program it in a way that you can adjust the input factors easily so that the output calculates its impact. If you aren’t familiar with spreadsheet programs such as Excel or Numbers, I recommend hiring someone on ODesk who understands input and output formulas for these programs. It will save you a ton of time and headaches by doing so and shouldn’t cost more than $200 to have someone implement. This spreadsheet will last you the life of your business as well, so get it done right.
Pro Forma Statements:
From the revenue model, you would be able to link to the financial statements and create all the necessary inputs which will then control the income sheet, cash flow statements and balance sheets. This will allow you to see what each year would look like and plan ahead for what kind of investments and financial instruments you would need as you move forward.
This is the fun part of the financial section. You get to play around with the numbers and understand how and why a certain input factor will affect your income, cash flow and balance sheet. If everything is hooked up carefully and accurately, you would be able to change any input factor and observe the result. Based on this, you should now write a narrative describing a few input factors such as demand, major input costs, taxes, labor costs and so on, and look at tolerances of where the company breaches break-even. This is a very important feature for your business plan as it allows VCs or potential partners to grasp the potential of the business.
SECTION 6 – Management
There are two areas you need to cover here. The first is the background of senior management and how that relates to the business and operations that concern this company. For instance, your CEO’s resume is listed in this section, along with everyone else’s. However, in the narrative you will describe what about this person’s experience makes him/her the best choice for the position.
The next step is to illustrate how each member works together and in what organizational fashion are decisions made. How is progress monitored and how are issues transmitted. This is the organizational structure. There are also a list of board members and committees that will provide guidance and direction to senior management.
The business plan should also touch on succession plans and HR policies as well.
Now, I understand that some of your businesses, in the beginning, will be a ‘one man show’ so to speak. In this instance, you will need to explain why you are the right person to run this type of business. In addition, if you want to be taken seriously by potential funders, you will have to explain how you plan to achieve your daily agenda (and it will come down to an outsourcing plan to eliminate the rudimentary tasks from your day as much as possible).
Tasks that absolutely must be outsourced are: web development, promotional product development, bookkeeping. You need to be spending the bulk of your time growing the business, not dealing with administrative tasks that can occupy valuable time. ODesk provides a plethora of skilled workers for these types of tasks which should be outsourced.
SECTION 7 – Competitive Analysis
We are finally here, almost at the end of the business plan. In competitive analysis you will conduct two (or more) types of analysis. My favorite is the SWOT analysis, the one you have been keeping track of since you began this exercise. The second one is a Five Force Analysis (FFA). In a FFA, you are looking at the five forces every company experiences: the power of the supplier, the power of buyers, competition, substitution and ease of new entry. They are pretty self-explanatory. Analyze these areas comprehensively and illustrate how you counter their effects in the business plan.
SWOT gives you a snapshot of all your strengths, weaknesses, opportunities and threats. You will have to provide a way to bolster your weaknesses and protect from your threats. The same applies with your FFA. You need to raise all the issues related to each factor then suggest solutions that will be implemented throughout your business plan. Trying to sugar coat and hide some of the threats to your business (or weaknesses) will only make you look like an amateur to potential funders. So, instead of trying to hide them, acknowledge them and explain how you will quell or eliminate them.
The idea of a business plan is to get your vision on paper as a starting point. From there, you look to validate that idea and build a business around it. Every aspect of that business needs to be put on paper so that you can then communicate it to whomever you need to.
I build business plans that are scalable and modular. That’s because a business is never static and you will always edit and append to the plan. You should always give yourself room to grow and make mistakes in the business. As much as possible you should do this business plan yourself. If you need to hire someone to do it, make sure not to take a hands-off approach – this is your baby.
The well-thought-out business plan outlined in this report can get you the funding needed for growth and it will keep you honest and on track throughout your venture. The road to riches starts with your plan…
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