There are many reasons you should have a business plan for your business if you want to succeed. At the absolute basic level, the business plan is a decision making tool to help you manage your business more effectively.
However, many entrepreneurs are intimidated by the task of creating a business plan. What’s required is awareness of your market coupled with highlighting the excitement for your business, whilst retaining a sense of realism.
Getting the right content and balance of your business plan is not easy. This is why I have created this step-by-step guide to help you out.
Purpose of the Business Plan
You may need the business plan for a number of different reasons. Maybe you are starting out and want to have an initial plan in place to help you grow?
Maybe you want to use the business plan to explain what you are doing to key stakeholders, such as potential business partners, or possible new recruits to the team.
Or perhaps you need to raise money for your business and understand that any type of lender or investor will want to see a business plan before they meet with you.
Whatever the case, the fundamental structure of your business plan will be the same. That is, the business plan will need to articulate to the reader what your business does and how.
The one thing to be aware of is that the business plan is a forward-looking document. As such, you need to give a balanced view on how you expect the business to grow. However, be sensible. It is impossible to say what the business will look like in 10 or 20 years. Typically, business plans are written to cover a time frame of three to five years.
Irrespective of what you want to use your business plan for, the guide below applies.
1. Products or Services
At the outset of your business plan it is important to explain what it is that your business actually does.
The most fundamental mistake people make in this critical section is not explain, in lay-man’s terms, exactly what it is that their business does. The problem with this is that you make it difficult for any potential reader to understand what you are talking about, even as they review the remainder of your plan.
Don’t be like these guys!
Some of the best business plans I have seen break the business down into its component parts to explain exactly what the business does, and how.
Thereafter, it is perfectly fine to start layering other components of your business once you have clearly laid down the framework of what the business does at its most basic level.
Explaining what you do
Think about it as though you were explaining your business to a 7 year old. How would you explain it so they got it? That is your starting point.
Assuming it’s required, only then would you get into more detail.
One approach that I have found extremely useful to go into more detail about your business is by presenting a case study. This is a walk-through for the reader of what a typical customer journey looks like when they purchase or use your product.
The benefit of this is it allows the reader to put themselves in the shoes of a potential purchaser to understand the journey the customer would take. This also makes the experience more real for them so that they can understand the benefits and potential limitations of your product or service.
It’s not enough simply to explain what your business does however. The obvious question will be “so what?”
In order to make this initial section of your business plan stand out and mean something to the audience, you need to explain the problem that your business is set up to solve.
There were many grills on the market but George Foreman’s grill allows you to cook meat and vegetables with convenience and healthily.
Personal music players have been around since the 80’s but it wasn’t until the iPod in 2001 that the problem of being able to listen to a large quantity of songs on the go was solved.
I still remember how, as kids, we would rely on the road atlas to navigate from one place to another flipping pages as we go. The Sat Nav systems that we can buy now do away with that problem and make it simple to travel anywhere without having to carry large road atlases and a navigator!
But you don’t have to change the world with your business in order to stand out.
Maybe you make gluten free foods and have a mobile shopping cart in a city’s business district to solve the problem of serving such food to office workers who can’t get access to such foods.
Or perhaps your business helps businesses with engagement by allowing them to retain their clients or team; issues that affect many businesses.
The clearer you can articulate the problem your business is solving, the more impactful your business plan becomes and the more interested the reader will be to read on.
2. Target Market
The next section you will want to talk through in sequence is the target market section. This section has the aim of explaining whom you are identifying as the core group of people you are looking to serve.
The importance of this comes from the mistake that too many entrepreneurs make in trying to be all things to all people. Your product or service will not be for everyone. It is lazy to assume this is the case.
In trying to serve everyone, such businesses end up serving no one and very quickly run out of steam and go out of business.
Instead, you need to take the time and effort to really think through who you are looking to serve and why.
Is your business focusing on a particular age demographic, or gender? Are you focusing on a certain income group, or education background? Or are you focused on serving people interested in a certain niche area?
Whatever the case, the target market section needs to outline who this group is and why.
So how do you know who your target market is?
Well, in order to find out, you need to look inwards, and then look outwards.
There is one critical question you need to answer when trying to determine who your target market is: what need does your product or service fulfil?
This question is all about thinking through who is most likely to consider using your product based on a one high-level criteria such as age range or location or family status.
For example, a mother of three young children living in the suburbs has very different needs and wants to a recent graduate living in the city who has just secured his first job. The type of product in a particular niche that may work for the mother will not work for the graduate and vice versa because they will both have different levels of disposable income and will want and need to use that in different ways.
To outline such distinctions, consider that millennials eat out about 13 times a month on average and spend about $100 on dining per month. In contrast, Gen Xers and boomers spend between $120 and $140 per month respectively, despite eating out only about half as often as the younger generation.
The video below gives you a good sense of the characteristics of millennials for example.
Once you’ve identified the initial criteria for people who you believe want what you have, then you need to apply other filters. This could be geographic location, income group, interests, personal status, or education level.
Through this approach, you are building up a sharper picture of the person that will buy your product or service because they need it, and because they have the disposable income to actually purchase it.
Once you’ve aligned potential customer needs with the product or service that your business solves, it is necessary to seek out additional information to verify and strengthen who you think will buy from you.
The importance of this is that it can give you actual data based on your assumed target markets’ habits right now, specifically with products such as yours.
The best way to do this is via a survey.
If you collect customer information this is as easy as sending out an email to them (perhaps with some incentive to encourage completions) and ask the questions that help you understand the demographic of people who are interested in what you have.
In addition to running your own surveys, there is likely to be lots of information already in the public domain for other businesses that offer similar products or services as you.
What kind of customer demographic do they market to? Research this data online to gather a view on the type of customers that are purchasing products similar to what you offer.
Depending on the niche you are in, you could do this as primary research.
For example, if you are in the coffee shop niche, you could conduct your own primary research as opposed to (or in addition to) the survey above by going to your local coffee shop and spending some time there to understand what people are buying. How old is each person and what is his or her gender or family status? Is a particular drink popular and what do they typically buy with the drink? When is the shop the busiest?
Once you’ve collated the data you can then use the findings for your own business.
3. Marketing & Sales
Having identified who your target market is, the marketing and sales section is about articulating how you sell to your target customers.
There are two components to consider here; the first is justifying your pricing; the second is explaining how you expect to get your product or service in the hands of your target customer.
How do you know how much to charge customers for your product or service?
Many businesses mess this part of their business up which results in customers not buying, or worse, customers buying at a rate that is unsustainable to cover basic costs.
At a very basic level in most cases you need to ensure that your product or service covers your costs. This is called pricing at cost. In other words, covering the costs to create the product or service and then adding a margin (say 10%) for profit based on what is normal in your niche.
However, other pricing models also exist. You could decide to market price. This is pricing competitive to the market. The danger with this is established players may be able to benefit from economies of scale that you don’t yet have access to.
Value pricing is pricing your product or service based on the level of perceived value that you think it brings customers.
This is an approach that works well with more premium or specialised products. A dairy free cake shop may charge higher for their cakes than a standard cake shop as customers who buy dairy free may have a health condition that means they will be happier to pay higher.
The ‘razor and blade’ pricing mechanism is one that many of us will be familiar with. Buying the initial razor blade with a couple of blades is usually disproportionately cheaper than buying replacement blades later on. The company knows that you don’t want to keep buying new razors all the time and make the majority of their money off the back of the new blades.
Buying popcorn in a cinema is a similar example. Cinemas make little money from the films themselves (when you take into account the cinema running costs and employees etc.). That is why they charge a disproportionately higher price for the popcorn.
The freemium model is popular in the software and technology world. Here you get access to basic functionality (say amount of data you can view). In order to get further functionality, you have to pay more.
Whatever the right pricing mechanism is for your business based on your target customer, explain why you have opted to price as you have.
Creating a product and hoping for the best is a strategy that will now work. You need to have a plan in place to explain how people will come across your product or service.
This is what marketing is all about.
There are a number of channels by which you can get your product or service noticed by customers.
Paid advertising is one of the oldest. This is buying an advert, and in the past was done via TV or radio. Nowadays, people pay to advertise their business on the internet or on social media.
However, you don’t have to pay to get marketing on social media. Assuming you have the appetite and resource for it, there are ways to publicise your business on Facebook, Twitter, Pinterest etc. but this requires consistency and committing the time to this, as well as learning about the social media channels you are marketing on.
Many businesses these days have websites. From the large multi-nationals, to the local shops, all understand the need to bring traffic to their world by providing content online. This is what’s known as content marketing and business blogs are good at starting discussions and opinions on areas of interest to the target audience with the aim of getting customers to buy down the line.
The most effective and oldest way of marketing however, is word of mouth. You will have been on both ends of word of mouth yourself.
When was the last time someone suggested a hairdresser to you that you then went and checked out? And how many times have you suggested a restaurant to someone based on the quality of service you received?
Word of mouth still remains the most powerful means of marketing to date but often it requires one of the other forms to start the ball rolling.
If you can explain how you expect to get target customers to know about you, then you’re on your way to having a real business i.e. one that has customers.
4. Metrics & Milestones
One of the big reasons the business plan exists is to operate as a decision-making tool.
As a result it is imperative you have a section in your business plan that talks to the key milestones you will achieve in your business over time, and, importantly, what you will monitor and measure to ensure you are on track.
Identifying your milestones
That’s what this section is all about. Obviously milestones for each business will be different.
For some businesses, a key milestone may be to get your first customer, for another it will be completing your product, whilst for others yet it will be to hire new staff.
Whatever stage your business is in, think forward to what you believe are the next two or three key things you would like to achieve over a defined period of time.
Given the business plan is being created over a three to five year time period, you can outline the key milestones over that time period. Say, after 12 months, after 24 months and after 36 months.
Although you need to be realistic, try to develop stretch milestones that really give you (and your team) something to strive for. The milestones need to be significant enough that they move the needle as far as the business is concerned.
Creating a website therefore, is not likely to be a material milestone for your business, but securing a partnership with a key wholesaler of goods for your business would be.
Measuring performance metrics
Once you’ve outlined your key milestones, you need to explain how you will monitor your business with metrics so you can determine that you are on track to achieve the metrics.
This is not a strategy of setting your milestones and forgetting them.
The key reason goals are not achieved is due to a lack of accountability and monitoring.
As such, breakdown each milestone to understand the mini-steps you need to achieve before you can achieve the overall milestone.
For example, in order to get your food product on the shelf of a big food store such as Wal-Mart may require you to first sell your food in local stores and achieve decent sales. It may also require you to get good feedback and testimonials from customers. Consequently, there are two key metrics right there that you would want to measure (local store penetration, and customer feedback), before you are likely to have a chance of selling in a Wal-Mart.
This section is often over-looked by entrepreneurs but critical in letting others, but more importantly, yourself know what direction the business is heading in, and how you plan to get there.
5. Financial Summary
This is perhaps the area of the business plan business owners struggle with the most. However, it need not be overcomplicated and in fact, the simpler you make this section, the better.
Investors and lenders, in particular, will look very carefully at your charts, tables, formulas and spreadsheets in the financial section because they know that this information is like the pulse of the business. It is the financials that show the condition of the business. In fact, many investors will take a peek at the financials section before looking at any other section.
There are three components to the financial statements for your business plan; income statement, balance sheet, and cash flow statement. Combined, they provide a picture of the business’ current value, its ability to pay its bills today, and its ability to earn a profit going forwards.
Typically, financial statements are created in a program such as Microsoft Excel as the data can be easily organised and linked.
The income statement is the primary financial statement that tells if the business is making money (or is likely to). It adds up all your income sources and subtracts the costs of doing business to give you a net income figure; what we know as the bottom line.
As a business owner the things you need to think about are:
- How many products or services do you expect to sell?
- At what price do you sell these?
Multiplying the two numbers together on a monthly basis will give you your monthly sales.
- What are the costs for you to deliver the product or service
If you make t-shirts this would be the cost of raw materials you need to make your product (i.e. cost of the basic t-shirt, cost of getting printing done etc.), and the cost of other general expenses such as labour, rent, electricity etc.
Subtracting the costs from the revenues will give you your income (profit), and after subtracting for local taxes, you get the net income.
If the income statement shows what you are earning, the balance sheet shows what you are worth.
A balance sheet can help an investor see that a company owns valuable assets that don’t show up on the income statement or that it may be profitable but is heavily in debt. It adds up everything your business owns (assets), subtracts everything the business owes (liabilities), and shows the difference as the net worth of the business.
Unlike the income statement, which reflects the financial position over a period of time (say a year), the balance sheet shows the status of the business on a given date, usually the end of your fiscal year.
Subtracting the liabilities from the assets of the business shows the equity in the business that is owned by you and any partners. Simply put, tracking changes in this number will tell you whether you are getting richer or poorer.
The balance sheet is linked to your income statement so an increase in sales will, all things being equal, result in an increase in your assets (accounts receivables, cash etc.).
Cash flow statement
The cash flow statement monitors the flow of cash over a period of time (month, quarter, year) and shows how much cash you have at hand.
This is linked to the other two statements as well and analyses the changes that have occurred on the balance sheet.
It’s different from the income statement, which describes sales and profits but doesn’t necessarily tell you where your cash came from or how it’s being used.
A cash flow statement consists of two parts. One follows the flow of cash into and out of the company. The other shows how the funds were spent. At the bottom is, naturally, the bottom line, called net changes in cash position. It shows whether you improved your cash position and by how much during the period.
It is important to understand, and if possible master, the financial statements, as this will help you run your business more smoothly and make better decisions.
6. Management Team
The team behind the business is important to include in your business plan, especially if you want to use the business plan to raise money.
This is because lenders and investors want to get a sense of who it is that they are backing.
At the end of the day, they are entrusting you (and your team) to deliver value for them and to be responsible with their money.
As a result, you need to explain why you guys are the best people for them to entrust with their money to grow your specific business.
Is it because you know your market sector extremely well and know exactly how your niche works? Or is it because you have the relationships that will help you get things done quicker and more effectively than anyone else. Perhaps it’s because you’ve run businesses successfully in the past and have the credentials to grow companies.
Whatever the case, this is the time to highlight this.
If you don’t yet have a team and are operating solo, the same still applies. The only difference is you need to be able to explain how you will deliver the growth you are saying you will deliver all by yourself.
7. Executive Summary
Despite this section being the first that will appear in your business plan, it is best to complete this at the end. The reason for this is that it is used as a summary (as the name suggests) of what your business is all about. Hence, once you’ve completed all other sections, you can easily refer back to complete the executive summary.
The executive summary should not be long. It should be punchy and to the point and I like to keep it to one or two pages. Writing it at the end will allow you to complete it quickly and easily.
Charts and graphs are a great way to direct readers’ attention to the key points. You can summarise the financials in this way to demonstrate the trends and key points for your business.
You need to understand that the executive summary is the gateway to your business plan and so it is important to ensure you grab the reader’s attention and let them know what you do succinctly, and why they should read the rest of the business plan.
Think of your executive summary as your pitch.
This should introduce you, your business and your product but you also need to deliver a hard sell in your summary.
This is the right opportunity to convince your reader that you have a great business that they should continue reading and, if relevant, invest their time and money in.
Keys to success
A sub-section I think is particularly useful to include in your executive summary, typically at the end, is ‘keys to success’.
This sub-section clearly outlines what makes your business stand out from the competition. It articulates to the reader why your business is special.
Maybe you focus on great customer service. Maybe the quality of your team is the best in the market leading to a better client experience. Or maybe you use the best quality tools to get the job done (i.e. the best technology, or the best quality ingredients if you own a catering business).
This is your opportunity to really differentiate the business from others so that you position your business in a league of its own so think hard about it and influence the reader to engage with the rest of your plan.
There is no doubt that having a business plan is essential to the success of your business.
The insight it gives you about your business is invaluable to help you make the right decisions, whether that’s trying to get your first customer, trying to scale the business for massive growth, or to raise money.
By following the steps outlined above, you will give yourself the best chance to succeed and take full advantage of your hard work.
If you would like my guide on exactly how to structure your business plan, then download my free guide on by clicking the button below.
Are there any other strategies you’ve used to create a great business plan? I would love to hear about them in the comments below.