Components of a business plan

There is no standard approach in preparing a business plan. There are many variations on the theme of what exactly goes into a successful business plan. All the variations however have the same basic elements. These are;

  • A brief description of the business background and purpose
  • Objectives; These should be both long term and short term
  • Products and services that will be offered
  • Competition

Market analysis and marketing strategy
Development and production plan/ Operations
Management and staffing
Financial Plan; This includes current and projected financial statements
Other aspects of a business plan that may be necessary for a successful write up are;

  • Executive Summary
  • A ttachments/ Supporting documentation

Following is a detailed description of each element that goes into making a business plan;

History and Background
The entrepreneur must have had a ‘moment of inspiration’ that led him to start the business. An idea must have been triggered the need to fill a gap that he had identified. In this section, the entrepreneur should communicate to the readers of the business plan how the idea was born.
This will also give a first impression to the investors or lenders who can then either give it thumbs up or tread cautiously.
The business plan should clearly explain how the idea will be translated into profits. This is what will give the investors a clearer understanding of the overall picture of the proposed business.
If the entrepreneur succeeds in winning the attention of the investor at this stage, he stands a high chance of getting the funds he urgently needs. If this section flops, then no matter how well written the other sections of the plan are, chances are high the reader will not be motivated to read ahead.

Objective
The entrepreneur needs to be specific as to what exactly he targets to achieve through the business plan. Most of the times, a business plan will be used to raise start up capital. At times, the plan may be prepared to get additional finance. The objective has to be very clear to whoever is intended to be the final reader.
Annual plans are used to manage a business. Business plans are used to attract capital. But there are exceptions, and often the difference between annual plans and business plans becomes muddled. Banks and other lenders or investors may require a copy of each year’s annual plan.
And management may use the start-up business plan as a basis for operating the business.
The most important thing for the entrepreneur to bear in mind is keeping the primary objective of and the primary audience for the plan clear. As a rule of thumb, if the plan will be used to attract investors or lenders, this is the primary objective and outsiders are the primary audience. If the plan will help manage the business, this is the primary objective and insiders are the primary audience.

The Product or Service
It is important for the reader of the business plan to thoroughly understand the product or the service that is going to be provided. However, it is important to explain this section in layman’s terms to avoid confusion. The entrepreneur should not overwhelm the reader with technical
explanations or industry jargon that he or she will not be familiar with.
It is important to discuss the competitive advantage the product or service has over the competition.
If the product is new, the entrepreneur should explain what new thing it is going to add to the present market
If appropriate, the entrepreneur should discuss any patents, copyrights and trademarks the business currently owns or has recently applied for and discuss any confidential and nondisclosure protection the business has secured.
Any barriers that that the entrepreneur has faced in bringing the product to market, such as government regulations, competing products, high product development costs, the need for manufacturing materials, etc. should be discussed
Areas that should be covered in this section include:

  • Is the product or service already on the market or is it still in the research and development stage?
  • If still being developed, when is the expected date of the launch?
  • What makes the product or service unique? What competitive advantage does the product or service have over its competition?
  • Can the product or service be priced competitively and still maintain a healthy profit margin?

The Competition
To the entrepreneur, understanding his competition’s strengths and weaknesses is critical for establishing his product’s or services competitive advantage. If he finds a competitor is struggling, he needs to know why, so he doesn’t make the same mistake. If his competitors are highly successful, he’ll want to identify why. He will also want to assess the need for another competitor offering the same product or service in the market.
Specific areas to address in this section are:

  1. Identify the closest competitors. Where are they located? What are their revenues?
    How long have they been in business?
  2. Define their target market.
  3. What percentage of the market do they currently have?
  4. How do the entrepreneur’s operations differ from his competition? What do they do well? Where is there room for improvement?
  5. In what ways is the business superior to the competition?
  6. How is their business doing? Is it growing? Is it scaling back?
  7. How are their operations similar to his and how do they differ?
  8. A re there certain areas of the business where the competition surpasses him? If so, what are those areas and how do you plan on compensating?

Analyzing competitors should be an ongoing practice. Knowing the competition will allow the entrepreneur to become more motivated to succeed, efficient and effective in the marketplace.
The entrepreneur will also need to do a competitive analysis. In this section he will need to do an in-depth analysis of the competitive advantages and weaknesses of his firm. When exploring weaknesses he should include information that will help allay any concerns that may arise as to their ability to significantly hinder his success.
This section is important, especially if the company is a start-up, because the entrepreneur will, typically, be competing with established companies that have inherent advantages such as financial strength, name recognition, and established distribution channels. Through this competitive analysis, the entrepreneur will be better prepared to counter competitor moves or strengthen his own position in the market.

The Market
Investors look for management teams with a thorough knowledge of their target market. If a new product is being launched, the entrepreneur should include his marketing research data. If he has existing customers, he should provide an analysis of who his customers are, their purchasing habits, their buying cycle.
This section of the plan is extremely important, because if there is no need or desire for the product or service there won’t be any customers. If a business has no customers, there is no business.
This section of the plan should include:

  • A general description of the market
  • The function that the entrepreneur is planning to capitalizing on and why
  • The size of the niche market. Include supporting documentation.
  • A statement and supporting documentation as to why the entrepreneur believes there is a need for the product or service in the market.
  • A projection of the percentage of the market that will be captured.
  • What is the growth potential of the market? Include supporting documentation
  • Will the firm’s share of the market increase or decrease as the market grows?
  • How will the growth of the market be satisfied?
  • How will the goods or services be priced in the growing competitive market?

The Marketing Strategy
Once the entrepreneur has identified who his market is, he’ll need to explain his strategy for reaching the market and distributing his product or service. Potential investors will look at this section carefully to make sure there is a viable method to reach the target market identified at a price point that makes sense.
The entrepreneur should analyze his competitors’ marketing strategies to learn how they reach the market. If their strategy is working, he should consider adopting a similar plan. If there is room for improvement he should work on creating an innovative plan that will ensure his product or service leaves a mark in the minds of his potential customers. The most effective marketing strategies typically integrate multiple mediums or promotional strategies to reach the market.

Advertising and promotion
The entrepreneur should give a break-out of what methods and media he intends to use and why.
If he has developed an advertising slogan or unique selling proposition he may mention it, but it isn’t strictly necessary.
He should outline the proposed mix of his advertising media, use of publicity, and/or other promotional programs.
The entrepreneur should explain how his choice of marketing vehicles will allow him to reach his target market. He should also explain how they will enable him to best convey his product features and benefits.
He should be sure that his advertising, publicity, and promotional programs sound realistic, based upon his proposed marketing budget. Effective advertising, generally, relies on message repetition in order to motivate consumers to make a purchase. If he is on a limited budget, it is better to reach fewer, more likely prospects, more often, than too many people occasionally.

Sales
His sales strategy needs to be in harmony with his business strategy, marketing strategy, and his company’s strengths and weaknesses. For example, if his start-up company is planning on selling products to other businesses in a highly competitive marketplace, his market entry will be easier if he relies on wholesalers or commissioned sales representatives who already have an established presence and reputation in the marketplace. If his business will be selling
high-tech products with a range of customized options, his sales force needs to be extremely knowledgeable and personable.
The following are some promotional media options to consider:
•• TV
•• Radio
•• Print
•• Web
•• Direct mail
•• Trade shows
•• Public relations
•• Promotional materials
•• Telephone sales
•• One-on-one sales
•• Strategic alliances.
Developing an innovative marketing plan is critical to his company’s success. Investors look favorably upon creative strategies that will put the product or service in front of potential customers.
Once the entrepreneur has identified how he will reach the market, he should discuss in detail his strategy for distributing the product or service to his customers. Will he use mail order, do personal delivery, hire sales reps, contract with distributors or resellers, etc.?

Production Plan / Operations
Once the entrepreneur has had an opportunity to really sell his idea and get the attention of potential investors, the next question on his mind should be how he will implement the idea. What resources and processes are necessary to get the product to market? This section of the plan should describe the manufacturing, research and development, purchasing, staffing, equipment and facilities required for his business.
The entrepreneur will want to provide a roll out strategy as to when these requirements need to be purchased and implemented. His financials should reflect his roll out plan.
In addition, he should describe the vendors he will need to build the business. Does he have current relationships or does he need to establish new ones? Who will you choose and why?
Operations is a catch-all term used to describe any important aspects of the business not described elsewhere. If the start-up is a manufacturing concern for instance, the entrepreneur should discuss critical elements of the manufacturing process. For retail businesses, discuss store operations. Wholesalers should discuss warehouse operations.
In addition to discussing areas that are critical to operations, the entrepreneur should briefly summarize how major business functions will be carried out, and how certain functions may run more effectively than those of his competitors. He should not get into long descriptions of any business or operation practices that will not sell his business plan to financiers.

Management and staffing
For most investors the experience and quality of the management team is the most important aspect they evaluate when investing in a company. Investors must feel confident that the management team knows its market, product and has the ability to implement the plan. In essence, the entrepreneur’s plan must communicate management’s capabilities in obtaining the objectives outlined in the plan. If this area is lacking, his chances for obtaining financing are
bleak.
If his team lacks in a critical area, he should identify how he plans on compensating for the void.
Whether it is additional training required or additional management staff needed, he should show that he knows the problem exists, and provide his options for solutions.

When preparing this section of the business plan he should address the following five areas:

1. Personal history of the principals:

a. Business background of the principals
b. P ast experience — tracking successes, responsibilities and capabilities
c. Educational background (formal and informal)
d. Personal data: age, current address, past addresses, interests, education, special abilities, reasons for entering into a business
e. Personal financial statement with supporting documentation

2. Work experience:
a. Direct operational and managerial experience in this type of business
b. Indirect managerial experiences

3. Duties and responsibilities:
a. Who will do what and why
b. Organizational chart with chain of command and listing of duties
c. Who is responsible for the final decisions?

4. Salaries and benefits:
a. A simple statement of what management will be paid position
b. Listing of bonuses in realistic terms
c. Benefits (medical, life insurance, disability…)

5. Resources available to his business:
a. Insurance broker(s)
b. Lawyer
c. Accountant
d. Consulting group(s)
e. S mall Business Association
f. Local business information centers
g. Chambers of Commerce
h. Local colleges and universities
i. Board of Directors
j. World Wide Web (various search engines)
k. Banker
The success of a business can often be measured its employees. Seventy percent of consumers will go elsewhere if they don’t receive prompt and courteous service. The entrepreneur must therefore, carefully consider the following questions in completing this section of the business
plan:
1. What are his current personnel needs (full or part-time)? How many employees does the firm envisions in the near future and then in the next three to five years?
2. What skills must employees have? What will their job descriptions be?
3. A re the people needed readily available and how will he attract them?
4. Will they be paid salaries or hourly wages?
5. Will there be benefits? If so, what will they be and at what cost?
6. Will he pay overtime?

Financial Data
At the heart of any business operation is the accounting system. It is important to have a certified public accountant establish accounting system before the start of business. At times there is a tendency for the entrepreneur to do it himself. An incredible number of businesses fail due to managerial inefficiencies. Leave it to the trained professional to help in the area of accounting and legal matters. If the business can’t afford a public accountant to establish the books, then it is undercapitalized. The entrepreneur needs to secure additional resources before starting.
One of the first steps to having a profitable business is to establish a bookkeeping system which provides data in the following four areas:
•• Balance Sheet/ Statement of Financial Position – indicates what the owner’s equity is at a given point (the balance sheet will show assets, liabilities and retained earnings).
•• Income Statement/ Statement of Comprehensive Income – also called the profit and loss statement is used to indicate how well the company is managing its cash, subtracting disbursements from receipts.
•• Statement of Cash Flows – this projects all cash receipts and disbursements. Cash flow is critical to the survival of any business.
•• Break-Even Analysis – is based on the income statement and cash flow. All businesses should perform this analysis without exceptions. A break-even analysis shows the volume of revenue from sales that are needed to balance the fixed and variable expenses.
If the goal of the business plan is to obtain financing, the entrepreneur will be required to generate financial forecasts. The forecasts demonstrate the need for funds and the future value of equity investment or debt repayments. This exercise is critical in obtaining capital for the business. To obtain capital from lending institutions he must demonstrate the need for the funding and his ability to repay the loan.
The forecast generated should cover a three to five-year period. This is a period in which realistic goals can be established and attained without much speculation. Forecasts should be broken down in monthly increments.
Projections and forecasts are an integral part of the financial portfolio. The entrepreneur should carefully and accurately state his assumptions. Honesty is the best policy! Over-optimism and over-inflation can lead to failure.
Other relevant Information
Executive Summary
Executive summaries should be short and concise—one page is ideal. It should cover the following points:

1. Strategy overview. The entrepreneur should start with a brief overview of his business strategy. If his business will be based, at least initially, on a particular product or service, he should describe this in the introductory paragraph.

2. Strategy logic. In the next paragraph or two, he should explain why his strategy makes sense or why his product or service has promise. Is he entering a fast- growing market or providing a unique product or service that distinguishes his business from existing businesses?

3. Business development. Next, he should describe the stage his business is in.
• Is it already generating sales?
• Has he done test marketing?
• Is a prototype developed?
• Has market research been performed?

4. Staffing. The entrepreneur should name the key people in his organization and describe, briefly, what special talents, expertise, or connections they will bring to the business.

5. Financial objectives. If his plan is being developed to raise capital, he should be clear about the amount of capital he is seeking and how he plans to use investor or lender funding.
6. Business organization. He should describe the form of business organization he will take and where the company will be located.
The entrepreneur should ensure to keep his summary short and easy to understand. He should avoid technical jargon and details. He should not try to summarize all of the different major elements of his plan. He should focus on the key elements that he think will be of most interest to his audience.

Supporting Documentation
The entrepreneur must include any documents that lend support to statements made in the body of his company’s business plan. The following is a list of some items for his consideration.
Note that this list is not complete and may vary depending on the stage of development of his business.

1. Resumes
2. Credit information
3. Quotes or Estimates
4. Letters of Intent from prospective customers
5. Letters of Support from credible people who know you
6. Leases or Buy/Sell Agreements
7. Legal Documents relevant to the business
8. Census/Demographic data

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