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Ask most business owners what a business plan is for and they will say that you need it when starting a business to get a bank account opened or when you try to get funding for a new project.

There is some truth in that but it is only part of the story. A business plan is much more than a tool to get finance and is not a static document which once written can get filed and forgotten. A business plan should change and develop with the business. It’s more than a statement of intent – it’s a benchmark of how the intent is being achieved.

This post outlines the key issues to consider when putting together a “typical” business plan. In truth there is no such thing as a “typical” business plan. If you are drawing up a plan in order to get finance from a bank you will need to emphasise different aspects of the plan than if you were drawing one up with a view to entering into a joint venture with a partner company.

What follows is a guide but remember that depending on the scope and purpose of your plan, you may need to omit or combine some sections.

The Purpose of Your Plan

You need to be clear in your own mind about what the business plan needs to achieve.

A primary aim of any business plan is to set out the strategy and action plan for the development of business over the next one to three years. The plan should explain your objectives and how you will achieve them. Where appropriate you should involve your employees in the complete planning process, as that way you “give them ownership” (terrible buzz-word) of the plan. In doing this you will need to identify priorities and discard non-priorities.

Once written the plan is a benchmark for the performance of the business and the act of writing the plan will help you crystallise and focus your ideas.

Although a business plan – or parts of it – should be shared with employees, more often than not you will be preparing the plan for someone outside your business, for example when you are:

  • Raising bank or equity finance.
  • Disposing of a business.
  • Attracting new senior management.
  • Attracting business partners, such as distributors and agents.

In this situation, the plan needs to ‘sell’ the business and you may need to have more than one version tailored to the target audience. For example, your bank manager.

Where to Start?

Start by identifying what makes you better than the competition. Think also about what the key ingredients of your future success will be and how you will strengthen your position in the market.

Then establish your overall business aims — where you realistically intend to be in three years’ time.

Next, decide on half a dozen objectives, each of which will make a significant difference to the future of your business. Define clear targets for these — so that you know exactly what you want to achieve, by when.

Many businesses think in terms of:

  • Income — more sales, better margins.
  • Customers — new customers, higher levels of customer satisfaction.
  • Products — improving existing products, launching new ones.
  • Human resources — recruiting new employees, developing new skills.

The next stage is to work out how you will reach these targets, by considering each aspect of your business in turn and creating a step-by-step action plan for it.

What Makes a Good Plan?

Your plan should be based on detailed information but that doesn’t mean that you should include all the detail in the plan. Leave the detail for operational or marketing plans. Detailed business plans are often quickly shelved, because they are difficult to use on an ongoing basis. It is far better to have a shorter plan and revise or update it regularly.

You should:

  • Focus on what the reader needs to know.
  • Cut out any waffle.
  • Ensure there are no spelling mistakes.
  • Put any substantial information, such as market research, in an appendix.

Base your business plan on reality. It is not a work of fiction (though many bankers might disagree) and there is a serious danger that an over optimistic plan can be counterproductive. For example:

  • Over-optimistic sales forecasts can lead to increased overheads followed by a cash flow crisis and drastic cost-cutting, all of which can seriously damage morale.
  • Be realistic, even if you are selling the business to a third party. Financiers, business partners and employees will see through over-optimistic plans that ignore weaknesses or threats. Management credibility will be damaged.

Your plan should be professional. For example:

  • Put a cover on it.
  • Include a contents page, with page and section numbering.
  • Start with an executive summary. This summarises the key points, starting with the purpose of the business plan.
  • If relevant, use charts.

Even if the plan is for internal use only, write it as if an outsider was going to read it.

  • Include company or product literature as an appendix.
  • Give details about the history and current status of the business.

When you have finished show a final draft of the plan to friends and expert advisers and ask for comments. What did they think of it? Which parts did they not understand?

What Should a Business Plan Include?

Business and/or products

Explain the history of the business:

  • When did it start trading and what progress has it made to date?
  • Who owned the business originally?
  • What is the current ownership structure?

Describe what your product or service is. Avoid technical jargon if possible.

  • In general, what makes it different?
  • What benefits does it offer?
  • What are its disadvantages?
  • What are the planned developments?

Market and competition

Define the market in which you sell. Focus on the segments of the market in which you compete.

  • How large is each market segment?
  • What is your market share?
  • What are the important trends, such as market growth or changing tastes?
  • Explain the reasons behind the trend.
  • What are the key drivers affecting each important market segment?
  • What is the outlook for those drivers and the market?

Describe the nature and distribution of existing customers.

  • Do they fit the profile of the chosen market segment? If not, why not?
  • Is there a heavy concentration of sales around one or two large customers?

Outline the principal competition.

  • What are the competing products or services? Who supplies them?
  • What are the advantages and disadvantages compared to your own?
  • For example, price, quality, distribution.
  • Why will customers buy your product or service instead?
  • Never overtly criticise or underestimate competitors.

Marketing and sales

In this section of the plan, you usually address these five questions.

  • Where do you position your product or service in the market place?
  • Is it high quality and high price?
  • Is it marketed as a specialist product due to a particular feature?
  • What unique selling features does it have?
  • Which of these features are you going to concentrate on?

What is your pricing policy?

  • explain how price-sensitive your products are.
  • Look at each product or market segment in turn.
  • Identify where you make your profits and where there is scope to increase margins or sales.
  • Set your pricing accordingly.

How do you promote your product or service?

Each market segment will have one or two optimum methods. For example, direct marketing, advertising or PR. If you are considering using a new method, start on a small scale. A failed investment in marketing can be costly.

Through what channels do you reach your end user?

• Compare your current channels with the alternatives.
• Note the distribution channels used by your competitors.
• Look at the positive and negative trends in your chosen distribution channel.

How do you do your selling?

Analyse the cost efficiency of each of your selling methods. For example, telesales, a direct sales force, through an agent or over the Internet. Include all the hidden costs of the direct sales force, such as management time.

Management and personnel

Give information on the senior staff be they owners or employees.

  • Set out the structure and key skills of the management team and the staff.
  • Identify any areas of deficiency, and your plans to cover this weakness.
  • Explain your recruitment and training plan, including timescales and costs.

Analyse the workforce in terms of total numbers and by department.

  • Compare the efficiency ratios with competitors, or with similar industries.
  • Useful figures might be sales, average salaries, employee retention rates and measures of productivity.

Be realistic about the commitment and motivation of the workforce.

  • Consider how you would survive the loss of a key worker.
  • Note any unusual upward pressure on remuneration.
  • Spell out any plans to improve or maintain motivation.

Operations

Analyse the capacity and efficiency of your operations, and the planned improvements.

What premises does the business have?

  • What are the long-term commitments to property?
  • What are the advantages and disadvantages of the present location?
  • Should the business expand or move?

What production facilities are there and how is production organised?

  • How modern is the equipment?
  • What is the capacity of the current facilities compared with existing and forecast demand?
  • What management information systems are in place?
  • Are they reliable?
  • Can they cater for any proposed expansion?

A financier would be very concerned if management information systems were inadequate. Management of a business is always limited by the quality of the information available.

Information technology

IT is a key strength (or weakness) of almost any business these days. The reliability of your IT and the development of IT systems to help your business are usually important issues.

Identify any quality or regulatory standards that the business must conform to (e.g. ISO 9000 or CE approval).

Financial performance

Your financial forecasts translate what you have said about your business into numbers.

  • Set out the historical financial information for the last three to five years, if available.
  • Break total sales figures down into component parts.
  • For example, sales of different types of product or to different types of customers.
  • Show the gross margin for each component of sales. List what costs are included as direct costs for each component.
  • Show the movement in the key working capital items of stock, trade debtors and creditors.
  • Use ratios such as stock turnover (in months), debtors period (in days), and creditors period (in days).
  • Highlight any major capital expenditure made in the period.
  • Provide an up-to-date balance sheet, and a profit and loss account.
  • Explain the reasons for the movements in profitability, working capital and cash flow. Compare them with industry norms.

Provide forecasts for the next three years.

  • The sophistication of your forecasts should reflect the sophistication of your business. A small business may only need profit and loss, sales and cash flow statements. A more complex asset-based business — or one with complex working capital requirements — will need balance sheet forecasts as well.
  • Use the same format as for the historical information, in order to aid comparisons.
  • Clearly state the assumptions behind the forecasts. These should tie in with statements in the rest of the plan. For example, if the plan states that the market is becoming more competitive, then profit margins should probably be falling.
  • Look at the overall trends of the historical and forecast numbers. Are they believable? Do the forecasts make allowance for the possibility of problems and delays?

If you are raising finance, use the cash flow forecast to predict your cash requirements.

  • Add a contingency element on to the funding requirement shown in the forecast. (This is often 10 to 20 per cent.) Consider what the mid-month peaks might be.
  • Include the likely interest or dividend costs of any new finance.
  • Carry out sensitivity tests on the cash required by reducing key items, such as sales or margin. Note the outcomes.
  • State why the cash is required.

SWOT Analysis

Set out a one-page analysis of Strengths, Weaknesses, Opportunities and Threats.

  • Strengths might include brand name, quality of product, or management.
  • Weaknesses might be lack of finance, or dependency on a few customers.
  • Opportunities might be increasing demand or a competitor going bust.
  • Threats might be a downturn in the economy or a new competitor.
  • Be honest about your weaknesses and the threats you face.
  • Spell out mitigating circumstances and the defensive actions you are taking.

Getting Help With Your Plan

No-one knows your business better than you do, but often it takes an outsider to ask the questions needed to highlight potential problems. When I have been working as a consultant with developing businesses it is interesting how often questions I pose along the lines of “why do you do it that way…?” are met with blank stares or replies like “We have always done it that way…” Using an outside consultant – you may be able to get help from your local Business Link in affording one – is a good idea. You can also get software which will help you through the process, some of which is very good, some of which is very poor. As a rough guide the more you pay the better the software. Again your local Business Link can advise and some banks offer free or subsidised software to new or existing customers.

If you need any further help or advice please contact me by email

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Category: Starting a Business

5 Responses to “What Use is a Business Plan?”

  1. Sabella says:

    We are a group of volunteers and starting a new scheme in our community. Your website offered us with valuable info to work on. You’ve done a formidable job and our whole community will be thankful to you.

  2. James Green says:

    Thanks Tim & Ben. Keep visiting and if you have any questions you want answering post them as a comment on the Any Questions page.

  3. Tim Ramsey says:

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  4. Ben Waugh says:

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

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  1. What Use is a Business Plan? - August 8, 2008

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