Business Plan Definition – Entrepreneur Small Business Encyclopedia

Definition: A written document describing the nature of the business, the sales and marketing strategy, and the financial background, and containing a projected profit and loss statement

A business plan is also a road map that provides directions so a
business can plan its future and helps it avoid bumps in the road.
The time you spend making your business plan thorough and accurate,
and keeping it up-to-date, is an investment that pays big dividends
in the long term.

Your business plan should conform to generally accepted
guidelines regarding form and content. Each section should include
specific elements and address relevant questions that the people
who read your plan will most likely ask. Generally, a business plan
has the following components:

Title Page and Contents

A business plan should be presented in a binder with a cover
listing the name of the business, the name(s) of the principal(s),
address, phone number, e-mail and website addresses, and the date.
You don’t have to spend a lot of money on a fancy binder or cover.
Your readers want a plan that looks professional, is easy to read
and is well-put-together.

Include the same information on the title page. If you have a
logo, you can use it, too. A table of contents follows the
executive summary or statement of purpose, so that readers can
quickly find the information or financial data they need.

Executive Summary

The executive summary, or statement of purpose, succinctly
encapsulates your reason for writing the business plan. It tells
the reader what you want and why, right up front. Are you looking
for a $10,000 loan to remodel and refurbish your factory? A loan of
$25,000 to expand your product line or buy new equipment? How will
you repay your loan, and over what term? Would you like to find a
partner to whom you’d sell 25 percent of the business? What’s in it
for him or her? The questions that pertain to your situation should
be addressed here clearly and succinctly.

The summary or statement should be no more than half a page in
length and should touch on the following key elements:

  • Business concept describes the business, its product, the
    market it serves and the business’ competitive advantage.
  • Financial features include financial highlights, such as sales
    and profits.
  • Financial requirements state how much capital is needed for
    startup or expansion, how it will be used and what collateral is
    available.
  • Current business position furnishes relevant information about
    the company, its legal form of operation, when it was founded, the
    principal owners and key personnel.
  • Major achievements points out anything noteworthy, such as
    patents, prototypes, important contracts regarding product
    development, or results from test marketing that have been
    conducted.

Description of the Business The business description
usually begins with a short explanation of the industry. When
describing the industry, discuss what’s going on now as well as the
outlook for the future. Do the necessary research so you can
provide information on all the various markets within the industry,
including references to new products or developments that could
benefit or hinder your business. Base your observations on reliable
data and be sure to footnote and cite your sources of information
when necessary. Remember that bankers and investors want to know
hard facts–they won’t risk money on assumptions or conjecture.

When describing your business, say which sector it falls into
(wholesale, retail, food service, manufacturing, hospitality and so
on), and whether the business is new or established. Then say
whether the business is a sole proprietorship, partnership, C or
Sub chapter S corporation. Next, list the business’ principals and
state what they bring to the business. Continue with information on
who the business’ customers are, how big the market is, and how the
product or service is distributed and marketed.

Description of the Product or Service The business
description can be a few paragraphs to a few pages in length,
depending on the complexity of your plan. If your plan isn’t too
complicated, keep your business description short, describing the
industry in one paragraph, the product in another, and the business
and its success factors in two or three more paragraphs.

When you describe your product or service, make sure your reader
has a clear idea of what you’re talking about. Explain how people
use your product or service and talk about what makes your product
or service different from others available in the market. Be
specific about what sets your business apart from those of your
competitors.

Then explain how your business will gain a competitive edge and
why your business will be profitable. Describe the factors you
think will make it successful. If your business plan will be used
as a financing proposal, explain why the additional equity or debt
will make your business more profitable. Give hard facts, such as
“new equipment will create an income stream of $10,000 per year”
and briefly describe how.

Other information to address here is a description of the
experience of the other key people in the business. Whoever reads
your business plan will want to know what suppliers or experts
you’ve spoken to about your business and their response to your
idea. They may even ask you to clarify your choice of location or
reasons for selling this particular product.

Market Analysis

A thorough market analysis will help you define your prospects as
well as help you establish pricing, distribution, and promotional
strategies that will allow your company to be successful vis-à-vis
your competition, both in the short and long term.

Begin your market analysis by defining the market in terms of
size, demographics, structure, growth prospects, trends, and sales
potential. Next, determine how often your product or service will
be purchased by your target market. Then figure out the potential
annual purchase. Then figure out what percentage of this annual sum
you either have or can attain. Keep in mind that no one gets 100
percent market share, and that a something as small as 25 percent
is considered a dominant share. Your market share will be a
benchmark that tells you how well you’re doing in light of your
market-planning projections.

You’ll also have to describe your positioning strategy. How you
differentiate your product or service from that of your competitors
and then determine which market niche to fill is called
“positioning.” Positioning helps establish your product or
service’s identity within the eyes of the purchaser. A positioning
statement for a business plan doesn’t have to be long or elaborate,
but it does need to point out who your target market is, how you’ll
reach them, what they’re really buying from you, who your
competitors are, and what your USP (unique selling proposition)
is.

How you price your product or service is perhaps your most
important marketing decision. It’s also one of the most difficult
to make for most small business owners, because there are no
instant formulas. Many methods of establishing prices are available
to you, but these are among the most common.

  • Cost-plus pricing is used mainly by manufacturers to assure
    that all costs, both fixed and variable, are covered and the
    desired profit percentage is attained.
  • Demand pricing is used by companies that sell their products
    through a variety of sources at differing prices based on
    demand.
  • Competitive pricing is used by companies that are entering a
    market where there’s already an established price and it’s
    difficult to differentiate one product from another.
  • Markup pricing is used mainly by retailers and is calculated by
    adding your desired profit to the cost of the product.

You’ll also have to determine distribution, which includes the
entire process of moving the product from the factory to the end
user. Make sure to analyze your competitors’ distribution channels
before deciding whether to use the same type of channel or an
alternative that may provide you with a strategic advantage.

Finally, your promotion strategy should include all the ways you
communicate with your markets to make them aware of your products
or services. To be successful, your promotion strategy should
address advertising, packaging, public relations, sales promotions
and personal sales.

Competitive Analysis

The purpose of the competitive analysis is to determine:

  • the strengths and weaknesses of the competitors
    within your market.
  • strategies that will provide you with a distinct
    advantage.
  • barriers that can be developed to prevent
    competition from entering your market.
  • any weaknesses that can be exploited in the
    product development cycle.

The first step in a competitor analysis is to identify both
direct and indirect competition for your business, both now and in
the future. Once you’ve grouped your competitors, start analyzing
their marketing strategies and identifying their vulnerable areas
by examining their strengths and weaknesses. This will help you
determine your distinct competitive advantage.

Whoever reads your business plan should be very clear on who
your target market is, what your market niche is, exactly how
you’ll stand apart from your competitors, and why you’ll be
successful doing so.

Operations and Management

The operations and management component of your plan is designed to
describe how the business functions on a continuing basis. The
operations plan highlights the logistics of the organization, such
as the responsibilities of the management team, the tasks assigned
to each division within the company, and capital and expense
requirements related to the operations of the business.

Financial Components of Your Business Plan

After defining the product, market and operations, the next area to
turn your attention to are the three financial statements that form
the backbone of your business plan: the income statement, cash flow
statement, and balance sheet.

The income statement is a simple and straightforward report on
the business’ cash-generating ability. It is a scorecard on the
financial performance of your business that reflects when sales are
made and when expenses are incurred. It draws information from the
various financial models developed earlier such as revenue,
expenses, capital (in the form of depreciation), and cost of goods.
By combining these elements, the income statement illustrates just
how much your company makes or loses during the year by subtracting
cost of goods and expenses from revenue to arrive at a net result,
which is either a profit or loss. In addition to the income
statements, include a note analyzing the results. The analysis
should be very short, emphasizing the key points of the income
statement. Your CPA can help you craft this.

The cash flow statement is one of the most critical information
tools for your business, since it shows how much cash you’ll need
to meet obligations, when you’ll require it and where it will come
from. The result is the profit or loss at the end of each month and
year. The cash flow statement carries both profits and losses over
to the next month to also show the cumulative amount. Running a
loss on your cash flow statement is a major red flag that indicates
not having enough cash to meet expenses-something that demands
immediate attention and action.

The cash flow statement should be prepared on a monthly basis
during the first year, on a quarterly basis for the second year,
and annually for the third year. The following 17 items are listed
in the order they need to appear on your cash flow statement. As
with the income statement, you’ll need to analyze the cash flow
statement in a short summary in the business plan. Once again, the
analysis doesn’t have to be long and should cover highlights only.
Ask your CPA for help.

The last financial statement you’ll need is a balance sheet.
Unlike the previous financial statements, the balance sheet is
generated annually for the business plan and is, more or less, a
summary of all the preceding financial information broken down into
three areas: assets, liabilities and equity.

Balance sheets are used to calculate the net worth of a business
or individual by measuring assets against liabilities. If your
business plan is for an existing business, the balance sheet from
your last reporting period should be included. If the business plan
is for a new business, try to project what your assets and
liabilities will be over the course of the business plan to
determine what equity you may accumulate in the business. To obtain
financing for a new business, you’ll need to include a personal
financial statement or balance sheet.

In the business plan, you’ll need to create an analysis for the
balance sheet just as you need to do for the income and cash flow
statements. The analysis of the balance sheet should be kept short
and cover key points.

Supporting Documents

In this section, include any other documents that are of interest
to your reader, such as your resume; contracts with suppliers,
customers, or clients, letters of reference, letters of intent,
copy of your lease and any other legal documents, tax returns for
the previous three years, and anything else relevant to your
business plan.

Some people think you don’t need a business plan unless you’re
trying to borrow money. Of course, it’s true that you do need a
good plan if you intend to approach a lender–whether a banker, a
venture capitalist or any number of other sources–for startup
capital. But a business plan is more than a pitch for financing;
it’s a guide to help you define and meet your business goals.

Just as you wouldn’t start off on a cross-country drive without
a road map, you should not embark on your new business without a
business plan to guide you. A business plan won’t automatically
make you a success, but it will help you avoid some common causes
of business failure, such as under-capitalization or lack of an
adequate market.

As you research and prepare your business plan, you’ll find weak
spots in your business idea that you’ll be able to repair. You’ll
also discover areas with potential you may not have thought about
before–and ways to profit from them. Only by putting together a
business plan can you decide whether your great idea is really
worth your time and investment.