Are business plans obsolete? Do prospective investors actually read these things, or are they more interested in your elevator pitch—you know, that jam-packed, spit-it-out-as-fast-as-you-can, idea-in-a-nutshell presentation that everyone says you have to have in order to attract the attention and investment capital you need?
What about the banks? Do loan officers actually take the time to analyze these neatly typed, spiral-bound blocks of double-spaced, 12-point Times Roman on good-quality bond? Or are they really only interested to know that you’ve taken the time to write it, as they cut and paste a few key paragraphs from your executive summary for the benefit of their supervisors’ reviews?
Asking whether it’s necessary to develop a plan for the business or professional practice you intend to start, buy or lead is like a child asking his parents if he really needs to go to school.
Ideas sound great at cocktail parties; in your backyard with a cold one in hand and supportive friends all around; and they sound especially great in your head as your concept grows larger and larger, and its success seems more and more assured. That is, until you grant equal time to the detail side of the ledger and the nagging list of reasons that your idea might not work in the first place.
This is why I ask, “Do you have an idea that can stand up to pen and paper?” When done the right way, the discipline and introspection that’s required to document your idea will help you come face to face with the “What if such and such were to happen?” questions that your friends might not know (or care) to ask and that the echo chamber inside your head might not make you ask yourself. Ideas need plans, plans require structure, and structure is only as durable as the extent to which it’s been tested.
Broadly speaking, business plans should full and fairly describe:
More specifically, a well-constructed business plan should include the following:
This section pertains to the industry in which you expect to compete, the idea you have in mind and the construct of the company you plan to create. Remember that ideas don’t have to be original: Think hardware stores, dental practices and bottled tea. However, the approach and execution have to be distinctive because if you’re not creating demand for a brand-new service or product, you’re going to be taking away market share from someone or something else. Also consider your motivation for embarking on the venture. Exploiting a newly discovered opportunity is one thing. However, a venture that is deliberately designed to be exploitative—in terms of the market it serves and/or the people it employs—is something else.
This section represents the execution part of the business plan for the new venture. It’s how you intend to distinguish and market your products and services to your target audience (value proposition), overcome competition or the resistance to change you anticipate, and achieve the pricing you need to make all this worthwhile. Strategies are not a once-and-done kind of thing. Just as the market doesn’t stand still, neither should your strategy. In fact, well-run companies develop and routinely update their strategies to take advantage of new opportunities.
This section describes everything that’s behind the curtain, such as manufacturing, quality control, customer service, accounting, finance and computer services. It should also address the organizational hierarchy you have in mind (you at the top and everyone else underneath), departmental roles and responsibilities, and the policies and procedures to properly govern your business.
This section describes you, your partners and all your individual ownership positions. It also describes relevant experience and expertise—that you and your management team have the right background and skills to undertake the venture you have in mind. It’s also the place where you’ll make the case for the teammates you’ve chosen and the advisors you have on call. Choose your associates, lenders and investors wisely—we are defined as much by the things we do and the actions we take as we are by the company we keep.
This section contains three to five years’ worth of projected income statements, balance sheets and cash-flow statements, as well as break-even analyses. It should also include a timeline of anticipated cash needs for debt (bank borrowing) and equity capital (investments in your company), supported by a detailed list of assumptions used in developing the budget.
This is where you get to talk about the things that keep you up at night with worry and excitement. It’s also the part that calls for intellectual honesty. Lenders, investors and prospective partners and employees know that all businesses—new ventures in particular—have risks. But what they want you to demonstrate is that you get it: that you and your team are being objective when it comes to identifying the risks, the likelihood of their coming to pass, the extent of the damage that could result, and that you’ve developed the proper policies, procedures and contingency plans in response.
While the business plan articulates the terrific idea you have and the organization you aim to build around it, execution is where the rubber meets the road. That’s why you’ll also need strategic and annual operating plans (which include budgets).
Strategic plans describe the enterprise’s strengths, weaknesses, opportunities and threats (SWOT analysis). Strengths and weaknesses are internally determined, and opportunities and threats are externally controlled. The analysis becomes your blueprint for overcoming organizational and operational deficiencies as well as for addressing the good and bad things that come from an ever-changing competitive landscape. These plans are routinely updated.
The operating plan takes all this into account—the fundamental concepts that are outlined in the business plan along with the continuously updated implementation strategies developed in support of them—within the context of a series of operational goals and financial objectives that you and your management team establish for your enterprise every year.
Excerpted from Practical Finance: A Straightforward Guide to Personal and Entrepreneurial Finance