Although the end product is worthwhile, preparing to write a business plan is a difficult process. You have to determine who your audience is, set the scope of the document, and organize the information so that your plan stands out.
As you prepare to write your business plan, the format and content of the document requires you to translate your thoughts about how you're going to run your business, and how it will perform, into a document that concisely conveys that information to others. Both of these elements depend on the nature of your business and the expectations of your audience.
Business plans generally share a similar structure and contain similar information about a business, but each plan is distinguished by characteristics that are unique to that business. Just as each person's resume differs because it reflects the particular life experiences of that individual, each business plan will differ. However, the format will make it instantly recognizable as a business plan.
The following key issues need to be examined before a plan is written:
Audience. Who are you writing the plan for? If you are writing for third parties outside of your business, their needs and expectations will govern the type of information and level of detail in your plan. Your neighborhood banker is going to be far more concerned with the financial performance of your business than with the salary structure for your employees. However, your future employees will be far more interested in salary structure and potential for advancement through growth of the business.
Planning timeline. How far into the future will your plan account for, and have you created a structure that can be easily updated when the initial time horizon is reached?
Type of business. How will your business by classified? Your business's classification as a service provider, product producer or seller, or mixed provider of products and services will have a large impact on the type of information in your plan.
Sources of information. What information is available to you when creating a business plan? How can you reduce the time and effort required to analyze your idea?
Reasonable assumptions. How can you set yourself up for success by taking a realistic look at internal and external conditions of your business, so as to make reasonable predictions about the future?
Your business plan may target internal and external audiences
As you're developing your business plan, a crucial consideration is who will read it and what they will expect to learn from it. Your audience can be divided into two groups:
- Internal audience. Those people, such as yourself and your key employees, who will be an active part of your day-to-day business operations. You are a very special member of this audience, since you will be using the plan on an ongoing basis. Be sure that the plan employs a format and structure that you are comfortable working with.
- External audience. Those people outside your business venture who will want to see some or all of the documents that make up the plan before they decide if they want to invest in, contract with, or otherwise have a relationship with your business. This includes such people as your banker, venture capitalists, credit rating firms, vendors, and others.
Consider your business plan's internal audience
The first and probably most important reader of a business plan is the person who creates it. The plan has to accurately convey how you are going to take abstract ideas and convert them into a successful small business. You know you have a good idea or you wouldn't even be thinking about writing a business plan. Therefore, you may have to force yourself to be skeptical and to challenge every assertion contained in the plan.
If you're serious about succeeding, you have to make the planning process work for you by being completely realistic about your chances, and even to think about worst-case scenarios. The fact that you have a good idea doesn't necessarily mean that you have a profitable idea. The time to unearth all the potential pitfalls is in the planning stage, not later on when unexpected events tend to be unfavorable and costly.
There may be others within the business with whom you will share the business plan, or substantial pieces of it. If you have partners, co-owners, or a Board of Directors, those individuals should see the plan after its completion. They may also have significant input into the plan as it's being developed.
If you have employees, many of the goals that you set for them will be derived from the plan. For example, your sales projections translate directly into your expectations for your sales representatives. In general, your employees will be able to do a better job if they see exactly where they fit with regards to your overall business objectives.
Example
Your business plan provides a detailed strategy for achieving a 50 percent increase in sales over the next 12 months. It would be a good idea to share the strategic analysis and your mission statement with your sales people. Your sales force will have a much better idea of what is expected of them, and they'll have a solid understanding of where they fit within your organization.
Obviously, there may be parts of the plan that you won't want to share with your employees. This is particularly true of portions that might reveal more than you want them to know about your personal finances. Similarly, you may choose not to share information regarding how the business finances its operations.
You'll have to use your judgment regarding the type and amount of detail that will be relevant to each of your employees. In many cases, you may want to share with them only your executive summary and the top-line goals for the year. In other cases, greater detail will be necessary and helpful in motivating key employees.
Address your business plan's external audience
A written business plan is important for educating your external audience. External entities provide things that are vital to starting and operating a business.
If you intend to obtain a line of credit or loan, it's highly unlikely that you'll get approved for a loan without a written business plan. Lenders need to be convinced that your business operations will generate the funds necessary to repay the loan. A plan that will be shown to lenders should emphasize the financial side of the business, including detailed historical and projected cash-flow budgets.
Others outside the business may also require the information and reassurance that a written plan provides. Venture capitalists and outside investors, for example, will want all the financial information that a banker would need, plus all the marketing, operational, and personnel information available. These types of investors view themselves as owners, so they want a lot of details. They also need to get a strong sense of your vision, experience, and commitment to the company.
In addition to banks, venture capitalists, and other potential sources of funds, you may want to share part or all of your plan with vendors, credit rating firms, and others with whom your business will interact. A written plan can be particularly helpful when negotiating with vendors regarding payment terms.
Consider your business plan's timeline
Making assumptions about your business is critical to your success. The results of your operations may be very close to what you predicted; however, over time, small deviations may occur, and a plan that accurately predicted your first few months can become increasingly inaccurate as those assumptions deviate from reality.
With an extended weather report, the predictions for today and tonight are more likely to be accurate than the five-day forecast. Similarly, many of the variables that can affect businesses in general or your business in particular aren't easily predicted. The value of the dollar compared to foreign currencies, interest rates, and many other factors that can affect a business's profitability change constantly. There are no guarantees. The question is how far in advance to plan.
The answer is not simple. For example, there were no doubt hundreds of aspiring entrepreneurs in Atlanta who figured out a way to profit from the Olympic Games. Some of those businesses were created, operated, and shut down in less than a year, as one-time opportunities. Conversely, some businesses may spend months or years in product development before any sales activities begin. A software business may expend tremendous amounts of money and time developing a product, with the expectation that the product will be sold, and upgraded, for a number of years to come. Obviously, the planning timeline for a software business would be far longer than a business designed around the Olympics.
As a general rule, a five-year plan is a reasonable starting point for an average business. That doesn't mean weekly or monthly plans for the next 60 months must be mapped out at once. The level of detail will decrease as your plan covers periods further into the future. The cash flow projections that are tracked weekly or monthly during the first year of operation may be projected by quarter in the second year, and annually in the third through fifth years. How this transition is managed will depend on your specific business.
Predicting your sales, costs of goods, or what the prevailing wage rates will be one, two or five years down the road is not easy. Obviously, the assumptions relating to the near future are more likely to be accurate than those relating to periods further out. For example, if interest rates have held reasonably steady for the past six months, assuming that they won't double or halve in the next month is a fairly safe bet. But you would be much less certain where the rates might be in 12 or 24 months.
Example
If you're a consultant and you tend to work on one or two projects at a time, it will be extremely difficult to plan out beyond the job or jobs you're currently working on. This may not take you through a five-year planning period, but it doesn't foreclose making rough estimates for the later period.
You'll also want to consider how often you'll be updating your plan. For example, if you're planning to update every year, you'll probably want to have at least 13 months of detailed projections in your plan so that if circumstances change, you'll still have a month's worth of information while you develop next year's plan.