Business Plan Elements | Key Components of a Good Business Plan
A business plan is a written summary and guide to starting and running a business. A well-written plan creates a blueprint for success and can help entrepreneurs obtain financing, create strategic plans, and follow marketing and sales plans. For many people, a business plan is the first step in the process of deciding whether to start a business - determining if the plan "fails on paper" first can help prospective business owners avoid costly investments.
A Good Business Plan
- Requires objective analysis and critical thinking – what seemed like a good idea can, under mature reflection, be exposed as a business lacking viability due to excess competition, a lack of sufficient funding, etc.
- Serves as a guide to operations for the first months and even years, creating a management blueprint.
- Communicates the company's purpose and vision, management responsibilities, personnel requirements, marketing plans, and competitive environment.
- Creates the foundation of a financing proposal for investors, lenders, etc.
While each business plan is unique, all business plans share a few common elements. The following are some of the key components of a well-crafted business plan.
The Executive Summary (sometimes called a Vision Statement) is a brief outline of the company's purpose and goals. While it can be tough to fit on one or two pages, a good summary includes:
- Brief description of products and services
- Your mission statement and business objectives
- The market space the business will inhabit
- Justification for viability (including a brief look at competition and your company's)
- Growth potential
- Funding requirements
For many people, the Executive Summary is the make-or-break section of a business plan. Companies solve customer's problems. If the Summary cannot clearly describe how the business will solve a particular problem – and profit by doing so – in one or two pages, then it is very possible the opportunity does not exist; or the plan to take advantage of the opportunity has not been well developed.
In effect, an Executive Summary is where the sizzle must meet the steak.
Products and/or Services
Clearly describe the products and services the business will provide. Highly detailed or technical descriptions are unnecessary. Use simple terms and avoid industry buzzwords. Describing how the company's products and services will differ from the competition is critical; so, too, is describing how your products and services are needed if no market currently exists. For example, when Federal Express was formed, overnight delivery was a niche business served by small companies, which required Federal Express to define the opportunity for a new, large-scale service and to justify why customers needed – and would use – such a service.
Patents, copyrights and trademarks owned or applied for should be listed.
Key questions to answer:
- Are products or services already on the market or still in development?
- What is the timeline for bringing new products and services to market?
- What makes the products or services different? Are there competitive advantages compared to other offerings from other companies? Are there competitive disadvantages that must be overcome?
- Is price an issue? Will operating costs be low enough to allow a reasonable profit margin?
Think of it this way; Products and/or Services answers the "What?" question for a business.
Market research is critical to business success. A good business plan analyzes and evaluates customer demographics, purchasing habits, buying cycles, and willingness to adopt new products and services.
Key questions to answer:
- What is your market? Include geographic descriptions, target demographics, company profiles (if business to business). In other words, who are your customers?
- What part of your market will you focus on? (In other words, what niche will you attempt to carve out?) What percentage of that market do you hope to penetrate?
- What is the size of your intended market? (Population, spending, etc.)
- Why do customers need – and will be willing to purchase – your products and services?
- How will you price your goods or services? Will you focus on being the low cost provider, or on providing value-added services at a higher price?
- Will your market grow? Why?
- How can you increase your market share over time?
Market Opportunities answers the "Who?" question.
Sales & Marketing
Offering great products and services is wonderful, but customers must know your products and services exist. Marketing plans and strategies are critical to business success.
Key questions to answer:
- What is your budget for sales and marketing?
- How will you determine whether marketing efforts are successful? How will you adapt if initial marketing efforts are unsuccessful?
- Will you need sales representatives to promote your products?
- What public relations activities do you plan (if any)?
Some business plans include examples of marketing materials: Website descriptions, print advertisement samples, etc. While including samples is not necessary, the exercise of creating actual marketing materials can help focus and shape overall marketing plans and objectives.
Sales & Marketing answers the "How will I reach them?" question.
This section is devoted to analyzing the competition – whether the current competition, or potential competitors who will attempt to enter the space if the business is successful.
Key questions to answer:
- Who are the current competitors? What is their market share? How successful are they?
- What market do current competitors target? Do they focus on a specific customer type, on serving the mass market, or on a particular niche?
- Are competing businesses growing or scaling back operations? Why?
- How will your company be different from the competition? What competitor weaknesses can you exploit? What competitor strengths will you need to overcome to be successful?
- What will you do if competitors drop out of the marketplace? What will you do to take advantage of the opportunity?
- What will you do if new competitors enter the marketplace? How will you react to and overcome new challenges?
Competition answers the "Against whom?" question.
Customers are necessary. Products and services those customers need are necessary. The next key step is to develop an operation plan to serve those customers while keeping costs in line to ensure profitability. The Operations plan should detail plans for research and development, processing, manufacturing, staffing, managing – in short, how to run the business on a day to day basis.
Key questions to answer:
- What facilities, equipment, and supplies will you need?
- Is research and development necessary, either for start-up purposes or as a part of ongoing operations, and if so, how?
- What are initial staffing needs? When and how will you add staff?
- With whom will you establish business relationships (vendors, suppliers, etc?) How will those relationships impact your day to day operations?
- How will your operations change as the company grows? What steps will you take to cut costs if the company initially does not perform up to expectations?
Operations answers the "How?" question.
Many investors and lenders feel the quality and experience of the management team is one of the most important factors for evaluating the potential for business success, however this section is not just important for "outsiders"; a good business plan evaluates the skills, experiences, and resources the management team will need. Addressing those needs during implementation will go a long way towards ensuring success.
Key questions to answer:
- Who are the key leaders? If actual people have not been identified, describe the type of people needed. What are their experiences, educational backgrounds, and skills?
- Do your key leaders have industry experience? If not, what experience do they bring to the business that is applicable?
- What duties will each position perform? Creating an organization chart can be helpful at this stage. What authority is granted to and responsibility expected of each position?
- What salary ranges will be required to attract qualified candidates for each position? What is the salary structure for the company, by position?
Management answers the "Who is in charge?" question.
When all is said and done, numbers tell the story. Bottom line results indicate the success or failure of any business. Financial projections and estimates help entrepreneurs and investors or lenders objectively evaluate a company's potential for success. If a company seeks outside funding, comprehensive financial reports and analysis are critical.
Most business plans include four basic reports or projections:
- Balance Sheet: Company cash position, including assets, liabilities, shareholders, and earnings retained to fund future operations or to serve as funding for expansion and growth. Shows the financial health of a business.
- Income Statement: Profit and loss statement listing projected revenue and expenses. Shows whether a company is or will be profitable during a specific time period.
- Cash Flow Statement: Projection of cash receipts and expense payments. Shows how and when cash will flow through the business; without cash, payments (including salaries) cannot be made.
- Break-Even Analysis: Projection of the revenue required to cover all fixed and variable expenses. Shows when, under specific conditions, a business can expect to become profitable.
Financial answers the "What are the numbers?" question.
A final key point to keep in mind when developing a business plan:
Every business faces challenges and opportunities. A good business plan recognizes that challenges exist and identifies and attempts to show the ways pitfalls or roadblocks will be overcome. Recognize competition exists and find ways to overcome that competition. If funding is an issue, identify boot-strapping or partnering opportunities. If the management team lacks critical skills, identify those skills and develop a plan to improve weaknesses or bring in advisors or other assistance. Don't just focus on how great an idea may be; focus on what could derail an otherwise great opportunity and how those challenges can be overcome.
Resources and Support
An abundance of business planning software is available on today’s market, some programs costing less than $100. Designed to help strategize, sort and calculate related financial data, these products also generate high quality tables and charts with just a few keystrokes. Plenty of free information is available on the Internet as well, but choose this material wisely.
Agencies such as the Small Business Administration and SCORE, the Service Corp of Retired Executives, provide detailed information on developing a solid business plan. Especially valuable are their “nuts-and-bolts” templates and tools.
The SBA has designed a Business Plan Tool, taking you through the writing process at your own pace. For a range of reliable business plan templates, visit SCORE’s template gallery, which covers start-ups, established businesses, financials, marketing and management strategies.
Financial institutions sometimes offer interactive templates as well, which provide detailed instructions as you write every step of your plan. Check with your bank’s business banking specialist to see what resources they can provide.
For one-on-one assistance, the Small Business Development Center, a nonprofit program providing management support to prospective and current small-firm owners, operates branch locations across the United States. The website provides a complete list of offices.
A Word about Mission Statements
The U.S. Small Business Administration describes a mission statement as a short declaration explaining the thrust of a business. Besides being integral to your business plan, a mission statement is a vital mechanism for informing consumers, clients, media and the general public of the company’s central philosophy, as well as for providing a succinct picture of your firm’s purpose, market and distinctive edge over competitors.
Since a mission statement is brief by nature, make sure to pack a lot of power into this handful of sentences. Here are some tips:
- Invite staff, friends, family or colleagues to provide constructive input during the writing process.
- Go for brevity. When roughing out the mission statement, strive to do this in three or four forceful sentences.
- Use clear terminology to honestly state goals, objectives and your customer service philosophy.
- Avoid exaggeration and embellishment.
- Include underlying corporate values.
- Strive for stylistic professionalism. If possible, seek help from prose-savvy associates – and proof, proof, proof.
- Business goals and structures can change, so update your mission statement as the need arises.
Finally, this short paragraph represents your entire business identity and purpose, so it merits a high profile in your market. Display your mission statement on websites, brochures, annual reports and all other corporate literature.