Business Plans

How do you write a business plan?

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January 19, 2016 9:34AM

Writing a business plan can be the most fun part of starting a new business. First you must think of what your business will be, what do you want it to do for you and what do you want it to provide for others. Next set yourself some goals and work towards them one at a time, for instance, getting your business licensed.

Business Plan Writing

Here is advice on writing business plans from the Federal Consumer Information Center and the Small Business Administration:

Before you start your plan, carefully research and answer these basic questions:
  • What niche or void will my business fill?
  • What services or products will I sell?
  • Is my idea practical, and will it fill a need?
  • Who is my competition?
  • What is my business's advantage over existing firms?
  • Can I deliver a better quality service?
  • Can I create a demand for my business?

Once you've determined that your small business idea is feasible, answer these questions:

  • What skills and experience do I bring to the business?
  • What will be my legal structure?
  • How will my company's business records be maintained?
  • What insurance coverage will I need?
  • What equipment or supplies will I need?
  • How will I compensate myself?
  • What are my resources?
  • What financing will I need?
  • Where will my business be located?
  • What will I name my business?

If you are starting a home-based business, you should answer these additional questions:

  • Does my home have the space (preferably separate) for a business?
  • Can I successfully run the business from my home?
  • Can I deal with the isolation of working from home?

Your answers to these questions will help you create a focused, well-researched business plan that should serve as a blueprint. The plan should detail how the business will be operated, managed and capitalized.

Some questions you will be able to answer on your own. Others will require careful research. There are many sources available to help you find the answers and make informed decisions. These sources include:

  • Small Business Administration (SBA) business information centers, located throughout the country;
  • counseling with business veterans through SCORE members affiliated with the SBA;
  • trade association studies, journal articles and trade shows;
  • regional planning organization studies on growth trends;
  • banks, realtor and insurance companies; and
  • customer surveys in your market area, which you can conduct on your own, or which may already exist.

Your business plan should cover the business basics from goals to management, from marketing to operations. A business plan is a blueprint for success, so don't scrimp on the details. A good business plan covers the following areas:

  • Describe in detail the business and its goals.
  • Identify the business ownership and the legal structure.
  • Discuss skills and experience you and your partners bring to the business.
  • Identify the advantages you and your business have over your competitors.
  • Explain how the business will be managed on a day-to-day basis.
  • Discuss hiring and personnel procedures.
  • Discuss insurance, lease or rent agreements, and issues pertinent to your business.
  • Account for the equipment necessary to produce your products or services.
  • Account for production and delivery of products and services.
  • Describe your product or service.
  • Identify the customer demand for your product or service.
  • Identify your market, including its size, location and demographics.
  • Explain how your product or service will be advertised and marketed.
  • Explain your pricing strategy.
  • Explain the source and amount of initial financing.
  • Estimate start-up costs.
  • Project operating expenses.
  • Develop a monthly operating budget for the first year.
  • Develop an expected return on investment and monthly cash flow for the first year.
  • Provide projected income statements and balance sheets for a two-year period.
  • Discuss your break-even point.
  • Explain your personal balance sheet and method of compensation.
  • Discuss who will maintain your accounting records and how the records will be kept.
  • Provide "what if" statements that address alternative approaches to problems that may develop.

Here are more opinions and answers:

One of the more common subjects that new business owners ask about is "how to write a business plan."

To help you with this task, let me first clarify what business people usually mean when they use the term "business plan," and then provide some suggestions and point you to resources that you can use to make the work of writing a business plan easier and more successful.

Defining Three Types of Business Plans:

People use the term "business plan" to refer to three distinct items: a firm's overall strategy and road map (which I'll call here a strategic plan), the 10- to 20-page document that entrepreneurs use to promote a new venture to investors and other key stakeholders (which I'll call here a new venture plan), and the 20- or 50- or even 100-page document that a new business owner uses to prove to him- or herself and others that he or she has thought carefully about starting or growing a business (which I'll call here a white paper plan).

How to Write a Business Plan: Strategic Plans:

I talk about business strategic planning in another short article on my website, so I won't repeat that discussion here. Let me note here, however, that a strategic plan is something quite different from a new venture business plan or a white paper business plan.

How to Write a Business Plan: White Paper Plans:

If you want to write a white paper plan, know that this process is well documented elsewhere. You can get a detailed outline for a white paper plan (in both English and Spanish), for example, from the United States federal government's Small Business Administration website at the Related Link.

If you have access to Microsoft PowerPoint, you should also know that PowerPoint's AutoContent Wizard supplies a detailed template for creating a white-paper-style business plan presentation.

How to Write a Business Plan: New Venture Plans:

If you want to write a new venture plan, you take a different approach. New venture plans, boiled down to their very essence, answer the following five questions that prospective investors need to answer in order to decide whether they should invest:

  1. Is a firm's product or service feasible? For example, can the technology really be developed? Is the necessary legal and regulatory approval obtainable? Does the process work in practice? Obviously, if a firm is already operating, this question doesn't need to be asked and answered. But for many types of new ventures - especially technology companies - the question does need to be discussed.
  2. Do customers want the product or service? In other words, is there true demand? This might sound like a silly question, but potential customers ignore many interesting and seemingly useful products and services.
  3. Is the basic transaction profitable? In other words, will people pay a price that produces a profit? Customers might want products and services that firms can't afford to provide.
  4. Is the return on investment adequate? Even profitable businesses might not be feasible if they require too much capital relative to the profits they generate. New ventures not only need to be profitable, but they also need to produce acceptable returns on investments. This return-on-investment measurement might be measured with either an internal rate of return (which is probably most common), or a net present value (which is most accurate). Note that an input to any return on investment calculation - the investment required to start the venture - is also an important factor in any prospective investor's deliberations.
  5. Can the management team operate the business? Even if you can answer "Yes" to the first four questions, that's not really enough. A new venture will probably fail if the management team lacks the skills to successfully run the business. So the last part of a new venture plan needs to describe the management team and why they're likely to succeed. The ideal answer to this question is, of course, to be able to show through past performance that the management team has successfully run a similar business.

I think you could use these questions as the highest level headings in a new venture plan. The only other headings you might want to add to such a new venture plan would be for an introduction and an executive summary.

Final observations about new venture plans:

First, it's very unlikely that an entrepreneur can honestly answer "Yes" to all five questions.

Many new venture plans do, of course, give "Yes" answers to all five questions. But I suggest that an honest answer such as, "We don't yet know," or "It depends on future developments," will attract better and more sophisticated venture investors and increase your chances of success.

I also note here that in the recent hysteria, many new ventures were funded even though they could honestly answer "Yes" to only the first question. (Of course, many shouldn't have been funded, but that's another topic.)

Second, answering "No" to any of the five questions means the new venture won't work. Each of the five questions is a link in the chain of success. Break a link and the chain breaks, too.

(The government's Small Business Administration has an online business plan template - refer to links below.)