3. Writing a Business Plan
By the end of this session, you will be able to:
- explain the importance of strategy and the strategic planning process
- recall the components of a strategic business plan
- apply tools to analyse a company and to develop strategy
- evaluate a company strategy
Topic: Why write a business plan?
‘Writing a well thought-out and organized business plan dramatically increases your odds of succeeding as an entrepreneur.’ A business plan is a document that describes your business. It covers objectives, strategies, sales, financial forecasts and marketing.
If you need to raise funds for your venture, it goes without saying that you’ll have to write a solid, formal business plan. Business owners who want to borrow money or attract investors will be successful only
if they have well-written, well-researched business plans. All of your potential lenders or investors will want to understand as much as possible about how your business will work before deciding whether or not to back it financially.
Financial forecasts are a vital part of a business plan, helping you to predict and plan your business finances in order to show potential investors that your business idea will fly. But preparing financial
forecasts is a good idea even if you don’t need to raise start-up money. The discipline of developing financial projections for your business plan includes:
- an estimate of start-up costs
- a break-even analysis
- a profit-and-loss forecast
- a cash flow
The financial forecasts will help you decide if your business is worth starting or if you need to rethink some of your key assumptions.
Topic: Components of a business plan.
1. Executive summary
The executive summary outlines your business proposal. Although it is the last section to be written, it goes on the first page of the business plan. It will be read by people unfamiliar with your business, so avoid jargon. The executive summary highlights the most important points and should sum up six areas.
The background to your business idea, including:
- the length of time you have been developing the business idea in its present form
- work carried out to date
- any related experience you have
- the proposed ownership structure of the
Define how your product or service:
- will stand out as different from other products or services
- will benefit your customers
- can be developed to meet customers’ changing needs in the future.
It is important to cover any disadvantages or weak points you feel the business may have. Be frank about these – it inspires confidence. Also explain any key features of the industry (e.g. special regulations, effective cartels or major changes in technology).
3.Markets and competitors
Unless there is a viable market and you know how you are going to beat the competition, your business will be vulnerable. You must show you have done the market research needed to justify what your plan. Focus on the segments of the market you plan to target – local customers or a particular age group, for example. You will need to:
- indicate how large each market segment is and whether it is growing or declining
- illustrate the important trends – and the reasons for them
- outline the key characteristics of buyers in each segment (e.g. age, sex or income)
- mention customers you already have lined up and any sales you have already
What are the competing products and who supplies them?
- List the advantages and disadvantages of all your competitors and their
- Explain why people will desert established competitors and buy from you
- Show you understand your competitors’ likely reactions to losing business, and demonstrate how you will respond to it
4.Sales and marketing
How will you position your product? How will your product or service meet your customers’ specific needs?
- This is where you show how your price, quality, response time and after-sales service will compare with competitors.
- Quote minimum order figures, if appropriate.
- How will you promote your product? For example, using advertising, PR, direct mail or via email and a
How will you sell to customers? For example, by phone, through your website, face-to-face, or through an agent?
- Show how long you predict each sale will take. Many new businesses underestimate the time involved in winning each order. In year one you may spend up to 80 per cent of your time making contacts and
- Will you be able to make repeat sales? If not, it will be hard to build up
Who will your first customers be? Unless you can demonstrate that you have a clearly defined pool of potential customers, starting your business is likely to be a struggle.
- Show which customers have expressed an interest or promised to buy from you, and the sales they
- How will you identify potential customers?
What contribution to profit will each part of your business make? Most businesses need more than one product, more than one type of customer and more than one distribution channel.
- Look at each product in turn. Examine your likely sales, gross profit margins and
- Identify where you expect to make your profits and where there may be scope to increase either margins or sales.
People reading the business plan need to be given an idea of why they should have faith in the management of your start-up. Outline the management skills within your team.
- Define each management role and who will fill it.
- Show your strengths and outline how you will cope with any
- Describe the background and experience of each team member.
- Clarify how you intend to cover the key areas of production, sales, marketing, finance, and administration.
- Briefly explain the management information systems and procedures you will use, such as management accounts, sales, stock control and quality
- Show how many ‘mentors’ and other supporters you will have access
Specify the facilities your business will have and how it will deliver the product or service to the customer.
- Show the pros and cons of the
- Indicate the facilities you will need to start (e.g. equipment and machinery). Some start-up businesses only need a desk and a
- Consider any potential limits to production
- If you are going to manufacture or distribute products, show how and where you are going to warehouse them and for how
- Provide a list of the employee roles you need to fill, and the skills required to fill them.
- Show how you selected your
Sales forecasts produced for start-up businesses are often over-optimistic.
Here are some important reality checks:
- How soon can you start selling? Will potential customers hold off for a year before they take you seriously and place an order?
- How often will you be able to sell?
- How many days can you spend selling?
- How long will each lead take to line up?
- What percentage of leads will turn into sales?
How much will you be able to sell?
- What will the average sale value be?
- Will most people give repeat orders or must you find new customers each tim
Your financial forecasts translate what you have already said about your business into numbers. A realistic sales forecast forms the basis for all your other figures. Break the total sales figure down into its components (eg different types of products or sales to different types of buyer).
Your cashflow forecast shows how much money you expect to be flowing into and out of your bank account and when. You must show that your business will have access to enough money to survive.
- Demonstrate that you have considered the key factors affecting cash flow; for example, wages and the level and timing of sales
- Show when you expect to be cash-positive – having more money coming in than going
Your profit and loss (P&L) forecast gives a clear indication of how the business will move forward. Summarise the annual P&L forecast for each of the first two or three years of trading.
If you are launching a larger start-up, you will also need projected balance sheets. These will show you the financial state of your business on day one and at year end, perhaps for the first two or three years. Do not get too protective about your forecasts. You may need to revise them.
The cash flow forecast will show how much finance the business needs. Your assessment of the risks will determine whether or not you need to arrange contingency financing. Say how much finance you will want, when and in what forms. For example, you might want a fixed-interest loan and an overdraft facility. State what the finance will be used for. Show how much will be for buying equipment and how much for working capital (financing stock and debtors).
10.Assessing the risks
Assessing risk will help you minimise problems and help build up your credibility with any investor or bank. Look at the business plan and isolate areas where something could go wrong (e.g. if your main supplier closes down). What would you do if that actually happened? Consider a range of what-if scenarios (e.g. what happens to your cash flow if sales are 20 per cent lower or 15 per cent higher than forecast). If there are serious risks:
- you can arrange contingency funding to cover the finance you may need
- you may decide that the business is too risky and abandon the whole
Detailed financial forecasts (monthly sales, monthly cash flow, P&L) should usually be put in an appendix at the end of the business plan. Include a detailed list of assumptions. For example, the profit margin on each product, debtor collection period, creditor payment period, stock turnover, interest and exchange rates, and equipment purchases.
You may want to give additional relevant information such as:
- detailed CVs of key personnel (essential if you are seeking outside funding)
- market research data
- product literature or technical specs
- names of target customers
- a list of the external data sources used in your research, which will add credibility to the
12.Presenting the plan
The more solid information you can gather for your own use, the better the business plan will be, although a banker or other outsider will not have time to read through all the details.
Keep your business plan short. Most business plans are too long. Focus on what the reader needs to know. Make it professional. Put a cover on the business plan and give it a title. Include a contents page.
Give your own definition of a business model.
Identify the activities related to inclusiveness at Novos Horizontes after reading Chapter B8 from ‘Is inclusive business for you?‘
Identify activities related to inclusiveness based on the NBM principles that you already do in your business operations.
Identify activities related to inclusiveness based on NBM principles that you might pursue in the future.
- Research & publications: ‘Is inclusive business for you?’ Chapter B8 Novos Horizontes, pp. 87–96.
- Research & publications: Link Methodology: Inclusive Business Model Toolkit, Pages 1–5, 12–26.