How to Write a Business Plan
A business plan can seem like a daunting task, and to some people, it may seem unnecessary, but a business plan has several benefits that make it a crucial step for any business. Thankfully, you don't need an MBA or formal business education to come up with a well-rounded, comprehensive business plan that will help either get investments or help form your overall strategy. In this article, you will learn how to create a business plan, about all the sections in a business plan outline, how to write a business plan step by step guide, along with why a business plan is important, and several bonus tips.
What is a business plan and why does it matter?
Simply put, a business plan is a document that outlines what your company is, what services it provides, the goals of your company, the people involved, and the potential financial rewards as well as requirements.
Why write a business plan? A business plan is useful for any kind of business but especially for startups and companies beginning their journey. For a new entrepreneurial effort, business planning guides the overall strategy and clarifies strengths and weaknesses. For a pre-existing company, it can help make certain that different teams understand what the company is trying to achieve and reevaluate the direction of the company.
If you are looking to raise capital through external sources A business plan is absolutely vital. Any potential investors will look for a comprehensive business plan before deciding to give you their money. Here are a few reasons why spending time on a business plan is important.
- It is an absolute requirement if you're looking for external investment
- Studies have shown that a business plan helps a company grow faster by identifying goals, creating schedules, and providing clarity at the beginning of an endeavor
- It helps you identify possible weaknesses and difficulties early
- It helps any new members understand the goals of the company
- It helps set a schedule and milestones
- It can help you find the right partner
- It can help you hire the right people
- It can help evaluate problems in the company
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How to write a business plan step by step
There are many parts of a business plan and the components of a business plan may vary based on who you are writing it for and what industry you are in but there are some sections that are usually included in every business plan template.
Overall you can think of a business plan as having four main sections. The first section describes the opportunity you have identified. This translates into the company description, market analysis, and competitor analysis. The next section is the execution, which includes the products and services offered and the marketing plan. Followed by the management and organization of your company, and finally the financials.
What does a business plan look like? In general these of the main elements of a business plan:
- Executive summary
- Company description
- Market and competitor analysis
- Management and organization
- Products and services
This is a general how to write a business plan template. It may seem like a lot of work but researching all these elements is crucial to building a successful business.
Step 1. How to write an executive summary for a business plan
Think of an executive summary as a brief description of the most important parts of the business plan. Clearly state the goals of the company, describe the products or services offered, identify the problem you are trying to solve, indicate the target audience, highlight the solution you are offering, state the potential financial benefits, and end with the funding request.
An executive summary is critically important when looking for investments. Most investors will look at the executive summary before deciding whether to read the business plan in full or not. That means that an executive summary for external sources is usually longer than for internal use, still keep it to a maximum of a page in length. Even though the executive summary is the first thing a person reads, it's better to write it after you've written the entire business plan, since the key metrics that you must include will only become clear afterward.
Think about these things when writing your executive summary.
- Have you clearly described what the company is offering?
- What is the value proposition?
- What is the specific problem you have identified?
- What is your solution and why do you think it will be effective?
- What is your target market?
- How do you differ from the existing competition?
- Why are your company and the people on your team the best to tackle the issue?
- Have you shown possible financial returns?
- How much money do you need to fulfill your goals?
- What kind of timeline do you expect results in?
Let's move on to how to write up a business plan!
Step 2. Your company description
Your company description is more than just what your company does. This is where you get the opportunity to impress with the overall vision of your business. The first thing you should do is elaborate on the specific problem you are trying to solve and how you are going to solve it. This can be expressed through a mission statement, value proposition, your core motivation, or a mix of these things.
When making a business plan, even if it's a new business, make sure to include some background information like when the company was founded, who are the founders, and how many people you have on the team. If you have been operational for some time you can add things like the number of employees, locations, a brief description of past financials, etc.
One of the most important things in your company description is the specific business goals you have for the short-term, midterm, and long-term. These objectives should be clear and concise, with realistic dates for when they will be achieved.
Step 3. Market research and potential
The first few sections of your plan are where you identify opportunities. What do you know about the market that makes your proposition worthwhile? It is likely that the person reading your business plan probably has some knowledge about the particular industry you are in, but by providing some background information you get the chance of explaining why your product or service is different and addresses a gap in the market.
Market research is crucial because it helps you understand the industry. If the industry is expanding, then what are the reasons behind its boom? What are the trends or patterns that you want to take advantage of? if sales of similar products are declining then why are they declining and how have you differentiated yourself?
One of the classic ways of conducting market research is by doing a SWOT analysis.
- Strengths: What are the strengths you are tapping into? Maybe it's an excellent time to enter the market because of a regulation change? Maybe you’ve identified a gap in the market that nobody has filled yet. Maybe your product or service is just that good! Think about all the reasons why you can be successful.
- Weaknesses: What are the potential roadblocks? By outlining the possible weaknesses, you can show how you either overcome them or how they don't apply to your situation.
- Opportunities: What are the specific ways you are trying to take advantage of existing opportunities? Why do you think these opportunities exist?
- Threats: What are the specific things you need to be careful of?
One of the first steps of doing market research is identifying your target audience. To get a realistic idea of what the demand is for what you are offering, you have to know how many people are going to be interested in whatever you are selling. The target market should be specific, it's not enough to say that the product is great and anybody can benefit from it.
Researching your target market helps guide the marketing and sales plan, as well as making realistic projections for financial returns. One of the most commonly used methods identifies specific numbers for the total available market (TAM); every person who potentially needs your product or services. Served available market (SAM), the specific subsection of the total number of people that you will target. And your share of the market (SOM) is the number of people that you will realistically expect to sell to.
Which of these consumer behavior elements is going to be important for you to determine your target audience? These are just examples, based on your specific product or service there might be unique pieces of information that you would like to know about your target.
- Their geographic location; can be based on cities, countries, neighborhoods Etc
- Demographics; or what is the age range?
- Their average yearly income
- Level of education
- Interests and hobbies
- Marital and family status
- Their values and beliefs
- What kind of job do they do?
Step 4. Competitor analysis
In a SWOT analysis, you briefly go over competitors as threats, but in this section, you should do extensive research into your potential competitors. It is unlikely that you have a product or service that is completely unique and addresses a need in the market that is not answered by anybody else. By doing a thorough competitor analysis you can both understand the market as well as show how you plan to differentiate yourself from everyone else.
Don't just think about direct competition. Direct competition is when somebody else provides a product or service that is similar to yours. For example, if you want to start a travel agency, other travel agencies and online platforms will be direct competition. On the other hand, indirect competition is about the underlying problem you are trying to solve. Taking the travel agency example, if the underlying issue is helping someone relax, indirect competition could be things like sports, movies, video games, Etc.
Competitor analysis also helps you understand what works and doesn't work in the industry.
- You can look at successful ad campaigns to understand what appeals to consumers
- Taking a look at other companies’ websites can help you design your own
- Look at a sample business plan from a competitor in the same industry
- Going online and reading reviews for their products and services is a great way of incorporating customer feedback into your overall strategy.
- By analyzing their pricing structure you can get a better idea of how to set prices yourself.
Step 5. Describe your product or service
This is where you talk about the specifics of your product or service. Now that you have shown that you understand the market, your target audience, and the competitors, you can show exactly why your product or service is better than others or fulfills a unique space in the market. Apart from the technical details, you should highlight the unique benefits you offer, and why these benefits appeal to customers.
Depending on your product or service this section will either be very technical and long or relatively short and simple. Google how to write a business plan sample to find some examples of different types of product sections.
If what you are selling is a product then you must include a list of ingredients as well as the general procedure of how to make the product. Some things to keep in mind are
- Identifying sources for each component
- A plan for the manufacturing process
- Identifying ways of getting the ingredients to the factory (supply chain management)
- OEM or original equipment manufacturer concerns
- Buying the correct copyrights, licenses, Etc
- How to implement quality control
- After-sales services like customer support, repairs Etc
Step 6. Marketing and sales strategy
You might understand the market perfectly and have a great product but if you don't know how you are going to sell the said product then your company will still fail. This is why a marketing and sales strategy is so important in a business proposal.
You should have a clear understanding of how you want to position your company. This is going to determine what kind of marketing strategy you use as well as how you're going to price your product or service.
Your competitor analysis should have shown you how other companies position themselves, ask yourself:
- How are you positioning yourself differently from them?
- If you want to target a higher spending target group then why is your product worth the extra cost?
- Do you want to use traditional marketing methods or are you going to focus more on social media and digital marketing?
- What platforms does your target audience engage with the most?
- How are you going to appeal to them in a way that's different from other marketing campaigns?
Your marketing strategy should include a launch plan; the different platforms you will initially be engaging potential customers on and the initial marketing strategy. That doesn't mean you should ignore future plans though, it should also speak about how the marketing campaign will evolve over time.
Pricing is an important element of sales strategy. Pricing something lower than what competitors offer can be an advantage but can also give the impression of low quality. On the other hand, pricing something higher than the market rate means that it is a premium product and has to position itself in its marketing campaigns appropriately. Generally speaking, you should price your products so that they cover the cost of each individual unit, but in some cases, especially if the majority of profits come from post-sales services then this may not be true.
There are few ways you can determine your pricing strategy.
- The most basic way of pricing is cost-plus pricing. Determine the cost of each individual unit and add the profit you want per unit to determine the eventual selling price. This is most often used for mass-produced goods but is difficult to determine for services.
- Another way of pricing is by basing it off the market rate. Look at what other companies similar to yours are pricing their services at and determine whether you want to price higher, the same, or lower depending on how you are positioning your service. This is a useful way for pricing services and can be used for products as well.
- The last way of determining your price is by its perceived value. How much benefit is the product or service you are offering giving to the customer? This can vary based on the income of your target audience.
Step 7. Business financials
If you have already been in operation for some time then compiling your business financials should not be too complicated. You have real data regarding your costs and profit margins as well as trends that you can easily display on tables or graphs. On the other hand, if you are a startup looking for funding you will have to make estimates and projections. In general, these are the things you should include when coming up with your costs.
- Cost of all the raw materials used
- Cost of delivering the raw materials
- Cost of manufacturing each product
- Cost of purchasing equipment
- Overhead costs like electricity, utilities, Etc
- Cost of shipping the final product
- Salaries for each employee
- Marketing budget
- Costs for lawyers, accountants, Etc
- Expected miscellaneous additional costs
Once you have all the data you can come up with either the cost per unit or the cost per hour of services rendered. One of the best ways of compiling your business financials is by using Excel (it's not nearly as complicated as it looks).
With your costs clearly mapped out you should be able to set a price that can be used to make projections based on how much of the target market you can acquire. These projections show the financial viability of your business, so it is important to try to be as accurate as possible.
Make forecasts that are pessimistic, realistic, and optimistic, so that potential investors have an idea of multiple different scenarios. There are some financial statements that are quite standard and should be included if possible:
- Balance sheets
- Income statement
- Profit and loss statement
- Cash flow statement
Keep in mind that in this section you should only present the most relevant numbers. The full statements, Excel sheets, graphs, Etc, will go in the appendices.
Step 8. Organization and management
You have to show that you have the right people in place to make your vision come true and grow the company. List all the current employees while highlighting the qualifications that make them the best person for the job.
This section should also include what positions will need to be filled in the future as the company grows. A formal organization chart is useful because it outlines each person's individual responsibilities as well as helps possible investors and future employees understand their role.
Step 9. Funding request
Finally, we get to the actual amount of money that you are looking for. You should clearly state not just how much money you need but also exactly how that money is going to be used.
An important thing to think about is whether you will be giving equity to potential investors or if you are selling debt. Selling equity essentially means that the person investing will own a portion of your company, whereas selling debt means that you will be paying them back through interest rates or payment plans.
You will have to give projections for the profitability of the company, and when potential investors can expect to get returns.
Step 10. Appendix for documents
The appendix is where you put all supporting documents. This can include financial tables, projections, marketing materials, contracts, agreements, essentially anything that you have referred to in the business plan that investors may want to take a look at.
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Tips for writing a business plan
Once you've done the first draft of creating a business plan it is important to go over it a few times to make sure that it is as good as possible. Here are some tips to think about when working on drafts!
Be as clear as possible
Business plans can become quite long, but that isn't an excuse to write as much as you want. Remember, a business plan is a document that provides specific information in a way that is engaging, informative, and easy to understand. You may have done everything perfectly, but if people get bored or lose interest then your business plan is going to fail.
Repeat your uniqueness
Every section of a business plan has the goal of showing why your business is better and different from existing products or services. Don't be afraid to reiterate the factors that make you competitive.
Go over business plan examples
One of the best ways of understanding how to structure a business plan is to go over an example business plan from the same industry. Not only is this great competitor research, but it also helps you understand how to structure a business plan. You can easily find a free business plan template online.
Adapt and evolve
Keep in mind that the business plan you propose can and should change over time. If it’s a proposal for a startup, the real experience will require you to make adjustments. If it's for an existing company, a business plan is a chance to re-evaluate goals and targets.
You never know, maybe you have some experienced business plan writers as friends. Chances are that anybody who went to a business school or tried to start their own company has experience with writing a business plan and can help you out.
Don't stick to one business plan format
You can follow a simple business plan template if you want, but make sure to adapt your plan based on who your target audience is. A business plan for an investor looks different than an internal business plan or a business plan for a university course.
How long does it take to write a business plan?
This really depends on what the goal of your business plan is. If it's an academic assignment with a specific word count, then it's probably going to take less time to write than if it's to pitch to investors.