Entrepreneurship 102: Creating A Business Plan

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Creating A Business Idea

A business plan is designed to clarify every part of a business

You can still run a business even if you like to improvise, but you won’t be very successful

Taking time to assemble a business plan clarifies the business to both you and everyone else involved

  • Nobody else is as passionate as you are, and a business plan helps bridge that gap so others can see how the idea could work
  • However, even if you’re thoroughly meticulous, you will forget something in the business plan

Even if you’re not presenting a business plan to lenders or investors, a business plan always has the same format and allows you to cover every aspect of your operations

A small business plan can be as short as one page

Think of ultimate questions all potential investors and lenders are asking

A. Is the idea timed too early where nobody understands it or too late where too many competitors are in the market?

B. Do you have sufficient talent, devotion, and skill to carry out the presented idea?

C. Is the business idea sound and reasonable?

D. Is the business model structured correctly?

E. Will the operations of the business have sufficient financing until it can sustain itself?

1. Start with a title page, table of contents, and executive summary

Make the title catchy and memorable

Create the executive summary after the rest of the business plan

  • An executive summary should be enthusiastic, professional, complete, and concise
  • It covers everything in a 5-minute presentation
    • What will the product be?
    • Who are the customers?
    • Who are the owners?
    • What does the future hold for the business and industry?
    • If there’s a loan
      • How much is needed?
      • How will it be used?
      • How will the money make the business more profitable to ensure a repaid loan?

2. Make a general company description

A company description is what the business will be and what it does

Start with a mission statement

  • Typically no more than thirty words
  • A message to show guiding principles and the reason for the business’ existence

Give company goals and objectives

  • Goals are what you want the business to be
  • Objectives are progress markers along the way to achieving those goals

Share the business’ philosophy in more detail

Briefly describe whom the business will market the products to

Describe the industry

  • Is the industry growing?
  • What changes are coming in the industry, short and long-term?
  • How will the company be prepared to take advantage of changes in the industry?

Describe the company’s most significant strengths and its workers’ best talents

  • What factors will make the company succeed?
  • What strengths give the most competitive advantage?
  • What background experiences, skills, and strengths does each worker bring to the company?

Indicate its legal form of ownership and why

  • Sole proprietorships and partnerships maintain personal legal ownership of the entire business
  • Corporations or Limited Liability Corporations/Partnerships (LLCs/LLPs) give a legal barrier between the owners and business

3. Give details about the company’s products and services

Describe each of the products or services in-depth

  • Give as much detail as possible
  • Reference technical specifications, drawings, photos, sales brochures, and any other bulky items in the Appendices at the back
  • If you’re selling a variety of products, you should know how to use and operate every one of them
    • Look at things with fresh eyes, as if you’re a new customer learning about it
  • When you think you’ve tested your product enough, test it some more
    • Never release a product until people who don’t work for you test it exhaustively

Show pricing, fees or leasing structures for products and services

Analysis each product’s competitive advantages and disadvantages

  • Quality compared to competitors
  • Unique or proprietary features
  • Cost compared to competitors
  • Anything else which could make the product or service better or worse than others

4. Provide a detailed marketing plan

Show your marketing research results

  • You must have enough research to answer any uncertainties and prove the data is consistent
  • Be as specific as possible with statistics, numbers, and sources
  • Your marketing plan is your source for sales projections later on

Give the industry’s economic facts

Total market size

Current market demand

Market trends like growth, consumer preference shifts, and product developments

  • Make a separate category for trend analysis if you’re making a non-profit organization

The growth potential and maximum opportunity for a business of its size

  • If the business will be a significant market player, the percentage the business will dominate the market

The scope of the content and how customers will see it

Barriers to entering the market and how to overcome each of them

  • High capital costs, production costs, shipping costs or marketing costs
  • How well consumers can accept a new brand and recognize it
    • Results of the brand not succeeding and the product seen as a commodity
  • Necessary training and skills
  • Unique technology and patents
  • Involvement with unions
  • International tariff barriers, quotas, and taxes

How changes will affect the company

  • New technology
  • Government regulations
  • Economic shifts and industry changes

Share the product from the customers’ point of view

List all features and benefits of each product and service

  • Features are built into the product to sell the benefits
  • Describe why the most significant features are special
  • Describe how the customer will see its benefits

You may think your product is perfect, but your clients won’t

  • Your opinion is probably not the most accurate, so listen to user feedback
  • Be careful about getting misguided: a customer will ask for unimportant and unrelated features when they’re dissatisfied with a product but don’t know why

Share after-sale services the business will give

  • Delivering the product and covering logistics costs
  • Refund and return policy
  • Warranties and service contracts
  • Technical support during and after the warranty
  • Customer experience followup

Describe the demographics of the product’s customers

Identify the target customers, their characteristics, and their geographic locations

  • Analyze whether distributors, wholesalers or retailers will give the product to an end-user

Create a demographic profile for each type of customer

  • Age and gender
  • Physical location and regional lifestyle elements
  • Income level, social class, occupation, and education
  • Anything industry-specific

Demographic factors are different for business customers

  • Industries involved, or what portions of the industries
  • Physical location
  • The size of the organization
  • Quality, technology, and price preferences
  • Anything specific to the industry

Share who the competitors will be

List every major competitor

  • Their names and addresses
  • Will they compete everywhere or just for certain products, customers or locations?
  • Will the business have significant indirect competitors, such as from a different industry?

Compare the two largest competitors on the following table:

competitors

Key competitive factors in the left column may vary on the industry

Rate competitors on a scale from 1 to 5

  • Clarify the importance of each value to customers

Very honestly and bluntly rate your startup on a scale from 1 to 5 compared to the ideal

  • Consider the company’s values into the rating
  • A disinterested stranger will give you the most accurate feedback
  • You can’t be every solution to everyone and should see multiple 1’s on your business’ rating scale

Share the marketing strategy for how you’ll market the product

Describe the specific corner of the market (niche) that the company will hold in a short paragraph

Explain how you’ll promote the product

  • How will you get the word out to customers?
  • What advertising media, why, and how often? Why not other alternatives?
    • Social media
    • Website
    • Search engines
    • Printed media
  • Are there any ways to take advantage of low-cost ways to advertise?
  • Will you use methods beyond paid advertising?
    • Trade shows
    • Catalogs
    • Dealer incentives
    • Word-of-mouth (and how will it be stimulated?)
    • Networks of friends or professionals
  • What image do you want to project and how do you want customers to see you?
  • What are your plans for graphic image support?
    • Logo design
    • Cards and letterhead
    • Brochures
    • Signage
    • Interior design, if the business has a physical location
  • What promotional budget do you have?
    • Before the startup
    • Ongoing costs

Give product pricing

  • Explain the reasoning behind the prices
    • Include frequently overlooked costs
      • Costs of consulting, meals, and entertainment before discussing the product
      • Travel expenses
      • Profit loss from the likelihood of a customer negotiating
      • Overhead costs (e.g., administrative, attorney, accountant)
    • Undercharging isn’t sustainable
      • A high profit margin is critical in a startup
      • Any idiot competitor can undersell you, so focus on quality, expertise, and niche focus more than the price
    • Share how the price matches the competitive analysis
  • Compare your prices with the competition
    • Describe the relevance of price as a competitive factor
  • Clarify customer service and credit policies

Provide a proposed location

  • Many startups can begin successfully from a house
  • The location is a reference for the marketing until the operational plan
    • How is the site important, if at all, to customers?
  • Show the location’s marketability as a venue
    • How convenient do people feel the building is?
    • How is its parking?
    • What do its interior spaces look like?
    • Is the location consistent with the business’ desired image and what customers want or expect?

Indicate distribution channels (how the business sells products)

  • Clarify it explicitly since the customer’s lifestyle connects closely to how they attain a product
  • Sent straight to the customer
    • Retail
    • Direct through mail order, web or a catalog
    • Company sales staff
    • Digital download or online cloud sharing
  • Sent through a third-party
    • Wholesale
    • Third-party agents
    • Independent representatives
  • Bids on contracts

Give data-minded sales forecasts to predict how well the company will perform

  • Make a well-estimated projection which most likely aligns with expectations
  • As a backup, it can help to give a worst-case scenario sales projection that you’re confident you’ll reach no matter what

5. Make an operational plan to show the organization’s daily activities

Describe how you’ll produce or acquire products or services with explanations about:

  • Quality control (maintaining a good quality product)
  • Customer service
  • Inventory control (preventing theft, decomposition or damage)
  • Product development (improving the product)

Give details about what your location needs

  • Add a drawing or layout if it’s relevant (often critical for manufacturers)
  • Physical requirements
    • The necessary amount of space
    • Type of building and its zoning
    • Any essential utilities like power and water
  • Accessibility
    • The building’s required convenience for transportation or suppliers
    • Whether the building needs easy walk-in access
    • Parking requirements
    • How near the building should be to a highway, airports, railroads or shopping centers
    • Hours the business will stay open to the public
  • The building’s construction
    • Most startups shouldn’t construct a building
    • Costs and specifications will constitute a large portion of the plan if you plan to build
  • Approximate occupation expenses
    • Rent
    • Initial remodeling costs and maintenance
    • Utilities
    • Insurance

Give details about the legal environment the business will operate in

  • Licensing and bonding requirements
  • Necessary permits
  • Health, workplace or environmental laws
  • Special laws which cover the industry or profession
  • Zoning or building code requirements
  • Essential and elected insurance coverage
  • Trademarks, copyrights, and patents (pending, existing or purchased)

Describe employees who’ll work there and what they’ll do

  • The number of employees, detailed job descriptions, and their pay structures
  • The types of labor (skilled, unskilled, professional)
  • The quality of the current staff
  • Where and how the company finds employees, how the company will train them and their requirements
  • Whether the company will use contract workers alongside employees
  • Tasks assigned to each worker and how their responsibilities will change over time
  • Schedules and written procedures to manage employee behaviors

Describe the work site’s inventory

  • The types of inventory kept (raw materials, supplies, finished goods)
  • Average value of the initial inventory stock investment
  • The inventory turnover rate and how it compares to the industry average
  • How seasonal inventory builds up
  • The amount of time from ordering to delivery

Identify the company’s key suppliers

  • Their names, addresses, history, and reliability
    • Make backup plans, since many suppliers take advantage of small business owners
    • Trying to sue for damages is usually not worth the cost and time
      • A lawsuit threat may lead to negotiating a fair settlement but severs any future relationship with the supplier
  • The type and amount of inventory the supplier will provide
  • Suppliers’ credit and delivery policies
  • Whether the business will experience supply shortages or short-term delivery issues
  • The stability of supply costs and how the business will manage natural cost fluctuations
  • Whether supplies can come from an unpredictable and unconventional source
    • Auctions
    • Craigslist/eBay
    • Flea markets or swap meets
    • Thrift stores
    • Friends and family

Describe the credit policy

  • Accounts receivable, the money others owe to the company
    • Plans to sell on credit and whether the consumers need it
    • Policies for issuing credit and how much
    • How to check new applicants’ credit
    • When credit is due
    • Discounts for prompt payment if the consumers find it customary
    • Costs of extending credit and how it builds into product prices
    • Show a sample accounts receivable chart with aging
    • Describe when slow-paying customers will receive a letter, phone call or attorney threat
  • Accounts payable, the money the company owes to others
    • Describe whether vendors offer prompt payment discounts
    • Show a sample accounts payable chart with aging

6. Show the organization’s management

Indicate who will manage the business

  • Show how their experience brings value to the business
  • Clarify unique or distinctive talents and abilities
  • Identify whether the business can continue functioning if someone must stop working

Create an organizational chart of the management hierarchy, position descriptions, and who is responsible for critical tasks

  • Include owners’ and key employees’ resumes if investors or lenders will review the plan

Describe who will provide professional and consulting support

Board of directors

  • An official group that determines the organization’s path

Management advisory board

  • An informal group of about 3-5 outside consultants with no financial interest in the organization
    • Adds measurable and distinctive value to the organization
  • An excellent management advisory board must have the right people
    • Objective, honest, effective communicators and problem solvers
    • Skilled in different vocations than the owners
    • Respected and knowledgeable in their fields
    • Genuinely interested in the organization’s success
    • Diverse skills, work, and life backgrounds
    • Well-connected in networks which could help the owners
  • When forming a management advisory board
    1. Require non-compete and non-disclosure agreements
    2. Give expectations for everyone’s commitment to a meeting and adhere to an agenda
    3. Clarify the type of assistance each member will provide
    4. Express gratitude for their time and rotate board members if the group is ongoing

Clarify the company’s primary attorney, accountant, insurance agent, and banker

Indicate any other outside consultants, including mentors or key advisors to the company

7. Provide draft financial statements to estimate the organization’s future status

Show all the assets, liabilities, and personal net worth of everyone involved

Include personal financial statements for each owner and stockholder

Generate reports of the startup’s initial expenses

Be as honest as possible

Make room for error in one of two ways

  1. “Pad” each item in the budget, though it can destroy the accuracy of the plan
  2. Add a separate item called “Contingencies” which plans for unexpected costs
    • The best approach since it maintains the most accurate plan
    • Base the amount on other entrepreneurs’ experiences from the same industry
    • A general rule is to make contingencies about 20% of the other startup expenses put together

Explain the amount and reason for every expense

Provide the most common accounting reports for the first business year

12-month Profit & Loss Projection

4-year Profit Projection (optionally, if you can estimate it)

Projected Cash Flow

Opening Day Balance Sheet

Break-Even Analysis in different scenarios to determine when the company will become profitable

The company can lose profit many times, but it can only run out of money once

Set aside 2-3 months’ worth of operating costs in an emergency fund along with an untouched line of credit to buy enough time to adapt

Create an MVP (minimum viable product) as soon as possible to find out the highest investment return

8. Add anything else you can think of or specific to the industry into appropriate plan sections

Indicate significant milestones which show business success

  • Milestones usually involve money, but can be anything measurable like a sales or marketing exposure number
Next: Creating A Business