A wise man once told me “Writing a business plan is like getting a root canal. It is painful, but necessary”. I would like to add that the wise man I am referring to eventually sold his share of a business for over forty million dollars and yes, he did have a business plan.
Nobody wants to do it and quite honestly, nobody really likes to read them either but they are absolutely essential for both the reader and the writer. The writer (the business owner) gains insight into the business they are attempting to succeed in. The reader gains insight into the likelihood of success based on the credentials and projections of the plan.
What is a business plan? The name really defines it, but it might be clearer to make the analogy that a business plan is basically a resume for your business. When you apply for a job, you have a well thought out and detailed resume highlighting your credentials to a potential employer. A business plan is similar in that it defines what you are doing, how you are doing it, and the expected financial outcome of your hard work.
A business plan should NOT be a book. Nobody wants to read through 50 pages of boring business plan material. Anyone that tells you that a plan should be at least X number of pages doesn’t know what they are talking about. A business plan should be exactly as long as is needed to describe the business entirely. If you can get it done in five pages then five pages is how long it should be. That being said, you do need to make sure you have covered all points of information in a realistic and credible way.
Okay, let’s get down to it. First, who are you writing the plan for? Like a resume, you will have a base copy that is a living document that you update throughout the life of your business. Your first copy will likely be for your own benefit; however there may be a time when you are trying to attract investors and at that point, you will need a copy tailored to meet that objective. Most of the internals will be the same, but your executive summary will likely be a bit more refined with your goal to round up money.
Before you start your business plan, it is wise to workout a simple spreadsheet to see if your idea is feasible. This should include some basic revenue and expense information that will be expanded upon in your business plan. Here is a sample spreadsheet. It shows monthly revenues and expenses. It is a Microsoft Excel document and has no macros or any other sketchy stuff going on. It is a safe download to help you out.
This spreadsheet makes a couple of assumptions. First, it assumes you have some clients and assumes you charge an hourly rate of around $75. Depending on your experience level, this rate may be higher or lower, but a fair market value for a developer is $75. Large consulting firms can charge twice that, but starting out you need to be realistic. A later part will discuss pricing in more detail. It also assumes you have an office space. In the last part, I said not to get office space unless you need it. Don’t get it just to be cool and feel like you have a business.
In a service-based business, you are capped as a proprietor by the number of hours you can work in a month. Once you have reached the point of being able to hire an employee or two, you can project more time, but you have to remember that you cannot necessarily sell 40 hours per week of client time. You do have a business to run after all and that requires time too. You have to assume at least 10 to 15 hours of general business time each week. This includes accounting, sales, marketing, administrative stuff, etc.
This is a completely stripped down spreadsheet and you will quite likely have a much more complicated revenue section if you sell physical products. It is just a base for you to build from. Try to think about all possible sources of income and expense when adding to this.
Okay, now for the plan itself. All business plans should clearly state the following:
1. What does your business do? What products or services do you sell?
2. Who is running the business? Why is the team or individual qualified to run it?
3. Who is your market? Who are the consumers that will be buying your products and services?
4. How will you reach your market? In what ways will you get the word out to your potential customers?
5. Who are your competitors? Who else is doing this and how many of them are there? How are you different? Why would a customer choose you over your competitors?
6. How much money will your business make? How much will it cost to generate revenue? How profitable will you be and how long will it take to reach profitability?
7. What sort of risks could cause your business to fail?
The first thing in a business plan is your Executive Summary and it should be the LAST thing you write. Quite simply, it is a summary and summaries are derived from the content of your plan. Almost nobody will read your entire business plan. They will read your summary, a little bit about who you are and why you are credible to run the business, then skip to the financials.
What does your business do?
You should start off with a clear explanation about your business. Who are you? What is the legal formation? Where are you located? Once you have established that basic information, you should give a summary of what your business is going to attempt to do. Remember that you cannot be overly technical. You have to be able to clearly explain your products and services to ordinary every day people. If you were a business analyst in the past, this should be very easy for you to do as you were formerly a liaison between Business and Technical people. If you are a developer or someone technical, this may be a bit more challenging as you will not be working only with tech uber-geeks anymore!
Who is running the business?
The reader of your plan will want to know who you are and why you are qualified to run the business. If you are working with more then one person, you should be sure to list their qualifications and position as well. This is an extremely brief version of your resume that highlights your accomplishments that are related to your business. There is no need to list that you were a dishwasher at Bob’s Big Boy when you were 15 years old unless that directly relates to what your business does. Focus on career accomplishments, former business endeavors, awards, general knowledge, and philosophy.
Who is your market?
This is really one of the most important parts of your business plan. Who are you selling your products to? Without a consumer, you cannot have revenue and profits. You need to completely understand the needs of your customer and why what you are selling is the best solution to that need. You need to research and define how many customers will potentially buy your products and services. This is known as the market cap. You can find this information through census data.
How will you reach your market?
The old saying “build it and they will come” is not true for business. You need to let people know that you have the solution for their needs. Doing this can be done in a myriad of ways including sales and marketing. Note that these two terms are not one and the same. They mean different things.
Sales is the process of interacting with a potential customer and discovering what their needs are and presenting how your business is the best solution.
Marketing produces sales leads and can come in the form of print brochures, signs, billboards, paid advertisements, etc. All of these things cost money and should be part of your marketing plan.
Your marketing plan defines the means in which you will get the word out to your customer, the cost of your marketing, and the results you expect to get back. I cannot place more emphasis on being realistic. Not every one one of your marketing ideas will yield the results you want.
Who are your competitors?
This is very important. You need to know who you are competing with. Not everyone that is in your business is necessarily your competitor. For example, just because you are selling custom built computers from your small store does not necessarily mean that Dell is your competitor. Dell is a likely option that your customers can choose, but there is no possible way you can compete with Dell. Their economies of scale are much larger. For example, you cannot compete on price.
If you are doing business locally, you will need to find who else is in the same business around you. If you are doing business online, you need to find others offering the same types of services. In both cases, you need to differentiate yourself from them. If you cannot think of any competitors, then I highly stress that you need to reconsider your business model. Competition means there is a market to sell to. It is exceptionally difficult to start a new market!
How much money will your business make?
This is where you convert the spreadsheet into very detailed financial information. Ideally, what you want to illustrate here is the cost of starting and running your business. This includes legal fees relating to business formation, trademarks or patents if needed, capital expenditures on equipment, software, and anything else necessary to begin operation. You will also need a bank account with funding in it. Discuss how much it will have when you start.
You will need to project income and expenses for a three year period. This will be very tricky as it is extremely difficult to know how your business will grow. Regardless, this is the kind of forward thinking that will help you succeed. You need to know how you will survive tomorrow as well as the type of growth and future expenses you will incur.
Again, you need to be realistic. If you project 1000% growth every year, you will never be taken seriously. Your growth and sales should be a direct reflection of your marketing plan. After all, new sales and recurring business is what drives success. Your marketing plan and financial plan should go hand in hand.
You also need to consider that with additional business, you will incur additional expenses in the form of employees, taxes, equipment, etc. Your financial plan should reflect this as well. This section will be the most scrutinized of your entire business plan. Make sure you know what you are talking about here.
What sort of risks could cause your business to fail?
Have you ever heard of SWOT analysis? This is where you do it. Strengths, Weaknesses, Opportunities, and Threats. Google it. This analysis will uncover many things you probably did not consider or think about.
Strengths. Describe the strengths you and your business have. Is it vendor relationships with preferable pricing? Is it ability unmatched by other individuals? Is it your geographical location?
Weaknesses. Don’t be afraid to list your weaknesses. As G.I. Joe always said “knowing is half the battle”. You need to know where you need improvement. Know where you are vulnerable so you can be prepared to deal with that inevitability.
Opportunities. You decided to start this business because of some opportunity most likely. What is it? Are there no other young attractive software engineers in your area?
Threats. There are many factors which could cause your business to fail. What are they? If you don’t find customers, you will not be able to succeed. That is obvious, but what else? Are you working with a certain technology that could be changed significantly by newer technology or by some political mandate? Think hard about this one.
Now that you are done with your business plan, you can write your executive summary. This should be no more then one page.
• Paragraph 1: Who are you and what do you do?
• Paragraph 2: What are you looking for? Investment? If so, how much?
• Paragraph 3: What is the potential for your business over the next three years? Summarize the totals from your financial plan.
• Paragraph 4: What will you use the investment for?
• Paragraph 5: How much and how quickly will the investment be returned?
For investors, it is really quite simple. How much money can they make, how long will it take, and how risky is it.
Writing out your business plan is boring and not much fun, but it should how you everything you need to know in order to make your business succeed. Once you are done this necessary step, the real fun begins!