Why write a business plan?
Writing the plan helps you think about what you are doing:
- The plan sets out your strategy and action plan over the next one to three years, or sometimes longer.
- As part of the process you set concrete objectives and plan how you will achieve them.
- Writing the plan helps you focus and develop ideas. Priorities are identified. Non-priorities are dropped, saving precious time.
- Putting the plan in writing makes it easier to spot any gaps where you have more to do.
- Once written, the plan is a benchmark for the performance of the business.
- By involving your employees in the complete planning process, you continue to build up a successful, committed team.
You may need a plan to explain your business to other people:
- A business plan is essential if you are raising financefrom a bank or outside investors.
- A good plan can help you attract new senior management, or business partners such as distributors and agents.
- You should tailor your plan to the target audience. For example, you may want the plan to ‘sell’ the busiens to your bank manager or investors.
- Ask the intended recipient if there are any specific issues they want the plan to address or a template you should follow.
How to write your business plan
Base the plan on detailed information where possible. But do not include all the detail in the plan. Leave the detail for operational or marketing plans. Keep the plan short:
- Focus on what the reader needs to know.
- Cut out any waffle.
- Make sure there are no spelling mistakes.
- Detailed business plans are often quickly shelved, because they are difficult to use on an ongoing basis.
Include any detailed information you need in an appendix. For example, you might want:
- detailed financial forecasts and assumptions;
- market researchdata that backs up what you say;
- CVs of key personnel (essential if you are seeking outside funding);
- product literature or technical specifications.
Base your business plan on reality, or it may be counterproductive:
- Over-optimistic forecasts can lead to increased overheads followed by a cash flowcrisis and drastic cost-cutting.
- Be realistic, even if you are selling the business to a third party. Financiers, business partners and employees will see through over-optimistic plans that ignore weaknesses or threats. Management credibility can be damaged.
Make the plan professional:
- Put a cover on it.
- Include a contents page, with page and section numbering.
- Start with an executive summary. This summarises the key points, starting with the purpose of the business plan.
- Use charts, if helpful.
Even if the plan is for internal use only, write it as if it were aimed at an outsider:
- Include company or product literature as an appendix.
- Give details about the history and current status of the business.
Review the plan:
- Read through the plan from your target reader’s point of view. For example, try to imagine the impression the plan will make on your bank manager.
- Check the plan is realistic. Make sure it includes the evidence to back up what you say (perhaps in an appendix) or that you can provide evidence if needed.
- Make sure you assess the risks. What might go wrong (eg if your main supplier closes down or you lose a key customer) and what would you do about it?
- Concentrate on the executive summary. People often make provisional judgements based on this. Only then do they read the rest of the plan to confirm their decision.
- Show the plan to friends and expert advisers for comments. Which parts did they not understand or find unconvincing?
Business and products
Explain the history of the business:
- When did it start trading and what progress has it made to date?
- If the business is a new start-up, what is your personal background in the industry and what have you done so far towards launching the business?
- Who owned the business originally?
- What is the current ownership structure?
Describe what your product or service is, avoiding technical jargon if possible:
- In general, what makes your product or service different?
- What benefits does it offer? What are its disadvantages and how will you address these?
- What changes and improvements are you planning?
Explain any key features of the industry. For example, any special regulations, whether the industry is dominated by a few large companies or any major changes in technology.
Market and competition
Describe the market in which you sell:
- Highlight the segments of the market in which you compete. What are the key characteristics of customers in each segment and what influences their purchases?
- How large is each market segment? What is your market share?
- What are the important trends, such as market growth or changing tastes? Explain the reasons behind the trend.
- What is the outlook for each important market segment?
Describe the nature and distribution of existing customers:
- Do they fit the profile of the chosen market segment? If not, why not?
- Is there a heavy concentration of sales around one or two large customers?
- If you are a new start-up, have you got any committed customers yet and who are your best prospects?
Outline the main competition:
- What are the competing products or services? Who supplies them?
- What are their advantages and disadvantages compared to you? For example, price, quality, distribution.
- Why will customers buy your product or service instead? How will your competitors react to losing business and how you will respond?
- Never openly criticise or underestimate competitors.
Marketing and sales
Where do you position your product or service in the market place?
- Is it high quality and high price?
- Is it marketed as a specialist product due to a particular feature?
- What unique benefits do you offer customers? For example, product reliability or customer service.
- Which of these benefits are you going to concentrate on?
What is your pricing policy?
- Explain how price-sensitive your customers are.
- Look at each product or market segment in turn. Identify where you make your profits and where it may be possible to increase margins or sales. Set your pricing
How do you promote your product or service?
- Each market segment will have one or two promotional methodsthat work best. For example, direct marketing, advertising or PR.
- If you are considering using a new method, start on a small scale. A failed investment in marketing can be costly.
What channels do you use to reach your end customer?
- For example, do you sell directly to the customer, or through retailers or agents? Do you sell online?
- Compare your current channels with the alternatives. Note the distribution channels used by your competitors.
- Look at the positive and negative trends in your chosen distribution channels.
How do you do your selling?
- Look at the cost-efficiency of each of your selling methods. For example, telesales, a direct sales force, through an agent or over the internet.
- Include all the hidden costs, such as management time.
- Explain how long it takes to make sales (and to get paid for them), what the average sales value is and how likely customers are to give repeat orders.
Management and personnel
Set out the structure and key skills of the management team and the staff:
- Clarify how you cover the key areas of production, sales, marketing, finance and administration.
- Address any areas of deficiency, and your plans to cover this weakness.
- Explain your recruitment and training plan, including timescales and costs.
Analyse the workforce in terms of total numbers and by department. Compare the efficiency ratios with competitors, or with similar industries. Useful figures might be sales, average salaries, employee retention rates and measures of productivity.
Be realistic about the commitment and motivation of the workforce:
- Show how committed you and other members of the management team are. For example, how much you have invested in the business.
- Consider how you would survive the loss of a key worker.
- Note any unusual upward pressure on pay levels.
- Spell out any plans to improve or maintain motivation.
Look at the capacity and efficiency of your operations, and the planned improvements.
What premises does the business have?
- What business premisesdo you have or need? What are your long-term commitments to property?
- What are the advantages and disadvantages of the present location? Should the business expand or move?
What production facilities are there and how is production organised?
- How modern is the equipment?
- What is the capacity of the current facilities compared with existing and forecast demand?
- Who are your key suppliers? How do you select and manage them?
What management information systems are in place?
- For example, management accounts, sales, stock control and quality control.
- Are they reliable? Can they deal with any proposed expansion?
- A financier will be very concerned if management information systems are inadequate. Management of a business is always limited by the quality of the information available.
Are your IT systems reliable? IT is a key strength (or weakness) of your business. The development of IT systemsto help your business is usually an important issue.
What quality or regulatory standards does the business conform to? For example, ISO 9000 or CE approval.
Your financial forecasts translate what you have said about your business into numbers. Set out historical financial information for the last three to five years, if available:
- Break total sales figures down into component parts. For example, sales of different types of product or to different sorts of customers.
- Show the gross margin for each component of sales. List what costs are included as direct costs for each component.
- Show the movement in the key working capital items of stock, trade debtors and creditors. Use ratios such as stock turnover (in months), debtors period (in days), and creditors period (in days).
- Highlight any major capital expenditure made.
- Provide an up-to-date balance sheet, and a profit and loss account.
- Explain the reasons for movements in profitability, working capital and cash flow. Compare them with industry norms.
Provide forecasts for the next three (or even five) years:
- The sophistication of your forecasts should reflect the sophistication of your business. A small business may only need sales, profit and cash flow budgets.
- A more complex asset-based business – or one with complex working capital requirements – will need balance sheet forecasts as well.
- Use the same format as for the historical information, to make comparison easier.
- Clearly state the assumptions behind the forecasts. These should tie in with what you say in the rest of the plan. For example, if the plan says that the market is becoming more competitive, profit margins should probably be falling.
- Be realistic about forecasts in new markets. For example, how much resource can you devote to selling, what success rate can you expect and how long will it take to convince new customers?
- Look at the overall trends of historical and forecast numbers. Are they believable? Do the forecasts allow for the possibility of problems and delays?
- Consider ‘what-if’ scenarios. For example, consider what will happen to your cash flow if sales are 20% lower than forecast (or 15% higher).
Put detailed financial forecasts in an appendix at the end. Include a detailed list of assumptions. For example:
- the profit margin on each product;
- how long it takes to collect payment from debtors;
- what credit suppliers will offer you;
- what financing you are expecting and the interest rate you will pay.
Use the cash flow forecast to predict any financing requirements:
- Add an extra contingency element onto the funding requirement shown in the forecast (perhaps 10-20%). Think about what mid-month peaks might be.
- Identify what types of financing you want. For example, long-term loans or an increased overdraft facility.
- Include the likely interest or dividend costs of any new finance.
- Carry out sensitivity tests on the cash required by changing key items, such as sales or margin. Note the outcomes.
- Explain why the financing is required and what it will be used for.
If necessary, get help: small business advisers at banks and business support organisations may help you put together financial forecasts free of charge.
A SWOT analysis helps show that you really understand your business and the key external factors that you need to deal with.
Set out a one-page analysis of strengths, weaknesses, opportunities and threats:
- Strengths might include brand name, quality of product, or management.
- Weaknesses might be lack of finance, or reliance on just a few customers.
- Opportunities might be increasing demand or a competitor going bust.
- Threats might be a downturn in the economy or a new competitor.
Be honest about your weaknesses and the threats you face. Spell out mitigating circumstances and the defensive actions you are taking.
Driving your business forward
Identify what makes you better than the competition. Think also about what the key ingredients of your future success will be and how you will strengthen your position in the market.
Establish your overall business aims. Where do you realistically intend to be in three years’ time?
Decide on half a dozen key objectives that will make a significant difference. Many businesses think in terms of:
- income – more sales, better margins;
- customers – new customers, higher levels of customer satisfaction;
- products – improving existing products, launching new ones;
- human resources – recruiting new employees, developing new skills.
Set clear targets. You should know exactly what you want to achieve, by when.
Work out how you will reach these targets. Look at each aspect of your business in turn and create a step-by-step action plan for it.
Writing a Business Plan Checklist
Your business plan should be the roadmap for how you run your business – and it’s vital if you want to attract finance. Follow our tips to create your plan.
- Clarify the purpose of the business plan, and whether it will need to ‘sell’ your business to outsiders such as potential investors.
- Review your SWOT analysis of the business (SWOT: strengths, weaknesses, opportunities, threats); consider including a summary with the plan.
- Begin the plan with background material on the history of the business, and an outline of your product or service and its USP(s).
- Describe the market segments in which you compete, market trends and key drivers’, and the nature of any existing customers or key targets.
- Outline the main competing products and suppliers, how they compare with yours and why you will be able to compete effectively.
- Explain how you market your product – its market position, pricing, promotion, and distribution channels – and how you sell.
- Set out the structure and key skills of your management and employees; assess their performance and motivation.
- Analyse your operations– premises, production facilities, management information systems – and any plans for improvements.
- Provide historical financial information; highlight key figures (such as sales, key operating and financial ratios) and trends, and explain anything unusual.
- Provide latest financials– an up-to-date balance sheet and profit and loss and cash flow statements.
- Prepare financial forecasts for the next few years; explain key assumptions and any contingency plans covering key areas of uncertainty.
- Make sure that the plan is short and focused; move any detailed information (eg market research, extensive financial information) to an appendix.
- Write a one- or two-page executive summary at the beginning of the plan.
- Read through the plan to ensure that it sets out a realistic strategy and action plan in a professional manner; ask advisers for their comments.
- Regularly review progress again the plan and update it as necessary.