Business planning is essential for success. Learn why you should write a business plan and what the key elements are.
Business experts frequently tout the importance of business plans. Yet there are many startups and existing business owners that don’t create a business plan unless they’re applying for a loan or looking for investors. Some simply don’t know how to write a plan. Others tell themselves there’s no need to waste time researching and writing out a plan because they have everything planned out in their mind.
So, how important is business planning? What’s the right approach for your business? Here are business plan basics to help you decide when to write a business plan and how to write one if you choose to do so.
What is a business plan?
A business plan is a document that describes your business concept, identifies your market (potential customers), sets out your financial goals and sales projections, and indicates how you will promote your business, distinguish yourself from the competition, and run the business to achieve those goals.
When you write a business plan you create a roadmap showing your business’ path to success. The plan helps you determine if your startup idea is viable or if your existing business is staying on track. A good business plan can also help motivate bankers and investors to provide the funding you seek.
Do I need a business plan?
Although you don’t need a business plan to start or run a business on your own if you won’t be seeking a loan or investors, it’s advisable to create one. That’s because starting or operating a business without a business plan is like trying to drive cross country without a GPS and fixed destination in mind. You might wind up someplace you like in the future, but without focus and direction, you are likely to run out of gas in the middle of a desert or wander aimlessly forever.
Why is a business plan important?
A business plan is important because writing one forces you to pay attention to all the elements that go into launching a business or product line and making it profitable. If you’re going to seek a bank loan or other financing for your business, you’ll need a business plan to convince lenders or investors to provide the funding. Bankers will want to know you won’t default on the loan; investors will want to see how they will profit by investing in your company. A sound business plan can help sway their decision in your favor.
But even if you won’t be looking for a loan or investors, you should write a business plan for yourself. Writing the plan makes you to focus on details such as business structure, marketing, competition, budget, profit margins, and financing. It forces you to set specific goals and make realistic and informed decisions about what methods you will use to reach your business goals and what your costs and profits are likely to be.
Your written plan also serves as a yardstick to measure your progress toward your goals and as a reference to keep you from veering away from your goals.
How can a business plan help an established business?
A business plan helps an established business by serving as the company’s GPS. By periodically reviewing your plan and comparing where you are with where you planned to be, you can keep yourself on course. It helps you spot slowdowns and potential problems so you can make necessary changes to keep your business moving ahead. It can also help you evaluate the potential profitability of new products or service lines you might want to add to your existing offerings.
How to write a business plan
You write a business plan by creating a document that describes your company, its products (or services), the market for the products, how you’ll reach the market, and how you’ll profit. The format, length, and detail in the business plan document depend partly on why you are writing the plan and what you stand to lose should the business fail.
If you are going to turn your favorite hobby into a part-time business and won’t have to spend more than a couple hundred dollars to do so, your business plan could be just a page or two of notes.
You will need a more traditional, formal plan, however, if any of the following circumstances apply:
- you will be spending a significant amount of money to launch the business.
- you will be borrowing money to start a business.
- you will be seeking investors.
- you will be expanding an already profitable small business.
- the success or failure of the business will significantly affect your family’s well-being.
In these circumstances you need a more traditional, detailed plan that shows the business will generate enough income to be profitable, repay bank loans and/or provide investors with a good return on their investment.
What are parts of a traditional business plan?
Here are the main elements of a traditional business plan:
- Executive summary. This is a brief overview of the pages that follow. Its purpose is to summarize the key parts of the plan and in a way that will excite and interest investors, bankers and others. Readers of the executive summary should be able to tell at a glance what the business is about, what you’re looking for, and how they’ll benefit. Although the executive summary appears at the beginning of the plan, it is the last thing you should write.
- Company history, including details of when it was founded, who founded it, where it is located, what kind of business the company is in, and what the objectives of the company are.
- Products and services description that details what the company sells and why the products appeal to customers.
- Market analysis. This section should describe your targeted customers, the size of the market, and make realistic projections for your products or services. It should discuss who your competitors are and how what you sell is superior or different from what the competitors sell. It should also analyze industry or market trends and how they might affect the size of the market.
- Strategy and implementation. In this section, you discuss how you’ll sell your products and services, how you’ll price what you sell, how you’ll acquire inventory or supplies, how you’ll distribute the products, and the milestones you are setting.
- Company management. Here you will describe the background of the management team and what their qualifications and key accomplishments are. What strengths do they bring to the company? List any board members and advisors as well. Resumes should be included for the key executives involved in the business.
- Funding request. This section should discuss how much money you want, what kind of funding you are looking for, how you’ll use the money, and how you plan to pay it back. (Omit this section if you’re not writing the business plan to obtain funding.)
- The financial plan. This section should include sales projections (how much do you expect to sell over what time period?), cost estimates, details about how you expect to finance operations and what assumptions you have made to arrive at sales, and other projections. (In other words, what basis do you have for thinking you’ll sell 50,000 widgets a month? Is the figure based on the results of test marketing? Feedback from focus groups? Demographic information?) You’ll also need past and projected cash flow statements, income statements, and balance sheets. Financial ratios showing assets-to-liabilities, debt-to-equity, and rate of turnover of inventory and receivables may also be required depending on the scope of your business and who will be reviewing your plan.
To finalize your business plan, add a title page and table of contents to make it look professional and make it easy for readers to find the information they want to see.
What to include in a business plan for a one-person business
If you are starting a one-person business and not looking for funding, you’ll want to include similar information, but it can be written in a less formal manner. Here’s the kind of information you should include:
- What business am I in? The answer to this question should dictate the focus of all your operations. For instance, are you in the business of selling dried floral arrangements or decorative home accessories? Are you a search engine optimization company or a full-service digital marketing agency? If you offer several different products or services, how do they fit together? What do they have in common? You should be able to summarize the nature of your business in a sentence or two. If you can’t do that, your business isn’t likely to have the focus it needs for growth and success.
- Who are my customers and what do they want to buy? Even though you aren’t looking for a loan or investors, you still need to gather facts about your market so you can make realistic sales forecasts.
- How will I sell my products or services? Many homebased entrepreneurs get so engrossed in developing their ideas that they forget to determine how they are going to sell their products or services and what it will cost them to make those sales. Typical is the person who pulls thousands of dollars out of savings to buy the equipment necessary to run a business, then discovers that newspaper ads cost more than he thought and that he doesn’t have enough money left to run ads long enough to have them do any good. The time to make such discoveries is before you sink thousands of dollars into setting up your operation, not afterward.
- What will all of my expenses be? One of the biggest mistakes made by people who start homebased and other very small businesses is not calculating all of their costs. Production and advertising expenses are only part of the costs you will incur. Even if you work from home you will still have to buy supplies (for instance, just printing out or photocopying a single page of text can cost you anywhere from about 2 to 5 cents, depending on the cost of ink and the type of paper you are using). You will also pay for business cards, letterhead and envelopes, equipment, repairs, gas (if you travel to your customers), professional fees, taxes, insurance, and so on.
- At what point will I make a profit? The point of being in business is to make a profit. You must determine how many sales you need to make at what price to make the kind of profit you want or need from the business. You also need to ascertain how long it might take you to reach that level of profit so you can determine if you have enough money to live on and support the business until it does become profitable.
Why do I need to put the business plan in writing if I don’t want a loan?
Planning your business in a written format will help you succeed by giving direction to your business activities. Writing down your plans will make you set specific goals and make realistic and informed decisions about what methods you will use to reach your business goals and what your costs and profits are likely to be. By reviewing the written plan, timelines and goals in the future you can measure your progress foward.
Where to get help writing a business plan
The SBA, SCORE, and other groups have templates available for you to use to create a business plan. You can find these and others by searching the web for the term “free business plan template.” Another option is to use fill-in-the-blank business plan software such as LivePlan [affiliate link] which takes you through the process with step-by-step instructions, provides sample text, and creates accurate financial reports based on your input so you don’t have to create your own spreadsheets. LivePlan, which includes access to 500 business plan examples, also lets you export your plan in various formats or share it privately with people you choose.
Are there other sources of help for writing a business plan?
An alternative to writing a business plan yourself is to hire a business plan consultant to write it. This can be costly but might be advantageous if your goal is to attract venture capital. If you choose to hire a business plan writer or consultant, be sure you understand what services they’ll provide for their fee, what their experience is, and get references.