FAQ
Small Business Development Center Business Plan FAQ
- What is a business plan?
- Who should do a Business Plan?
- How do I start writing my Business Plan?
- Why start with a Market Analysis for my product or service?
- Where do I find information on my industry?
- What about the competition?
- How do I make a Sales Projection?
- When do I discuss my Product and Services?
- What is this "supply and demand" thing?
- What is a Feasibility Study?
- What is a Marketing Strategy?
- What is an Operation Plan?
- How do I create a Cash Flow Statement?
- What is a Profit and Loss Statement, a Balance Sheet, and a Schedule of Events?
- Do I need a management plan?
- What is a Plan Summary?
- Is there a difference in how I develop and how I present the Business Plan?
- Should I use business plan software?
A business plan is the result of thoroughly investigating your industry, your market, your product, your financial situation, and your proposed organization. A business plan outline provides an organized system for researching the feasibility of your business. In addition to providing a game plan for directing and guiding your business, a completed business plan can provide a great tool for communicating your business to potential investors and banking institutions.
Who should do a Business Plan?
A business plan should be done by anyone starting a business or making major changes within their existing business. This could include adding product lines, increasing sales, purchasing another business, or a multitude of other changes within the existing business. Planning for a new business or changes within a current business is paramount for success. Statistics have shown conclusively that those who develop and implement a business plan tend to survive and those who do not fail.
How do I start writing my Business Plan?
First understand that business planning is a process that leads to a product. Your internal business plan should be in a format that is easy for you to understand, access, store and retrieve, edit and update.
Use this Step-By-Step Guide to creating a business plan.
Why start with a Market Analysis for my product or service?
A common mistake is thinking that "My product/service is the greatest thing since sliced bread and everybody will want it." Supply side thinking is the first great mistake of many failed, entrepreneurs. Those who succeed identify target markets,learn about their needs and provide the appropriate bundle of goods and services to meet those needs.
There are two common definitions of marketing. The first is selling something you already have. The second more complete definition involves discovering a need and filling it! An old business adage states "Nothing moves in business until you sell something." Smart business people identify sales opportunities first. So please table your product and service ideas until after thoroughly researching the marketplace.
Find out as much as possible about the industry you want to enter. Is it emerging, growing, stable or declining? What are the trends? Who buys? What do they buy, or leave on the shelf, and what are they asking for? How much do they buy? When do they buy? What percentage of the population buys? What is the demographic profile of each target market?
Where do I find information on my industry?
Virtually any industry you can imagine has a professional association that gathers data and processes it into useable information for their membership. Go on-line and search for "(your industry) association". Look for an association that provides statistics. Many will publish trade magazines, newsletters or e-letters. They may also provide membership or vendor lists, although this information is usually only available to members. It may be a good idea to become a member. If you don’t have internet access, go to the business reference section of the library and research the Encyclopedia of Associations, Statistical Abstract of the United States, Annual Statement Studies by The Risk Management Association (RMA), and Dunn & Bradstreet Annual Statement Studies. In addition, here is a list of web sites to help you. These resources will provide you with statistics about your industry and your consumer.
Apply the national statistics to your local demographics. If three percent of the national population uses the product and your local population is 100,000 then you can expect 3,000 potential customers. Then consider identifying your target markets. Are there under-served markets with pent-up demand in your area? You may create a market niche by supplying the products and services they can’t find elsewhere. Are there opportunities to sell to government agencies, clubs and user groups or business to business? Select those markets that have the greatest potential for success, as you define it. That may include profit, return on investment, long term sustainability or some other valuation you may choose.
First let’s dispel one of the common myths that "I have no competition! Even though there may be nobody in their demographic area providing the same product or service, most competition is for discretionary dollars. Therefore, they are in competition with anybody who wants to sell anything.
You need to identify all competitors and analyze their strengths and weaknesses to determine how you can best compete. Realistically estimate what percent of the consumer population (market share) will become your customers, and why. There are only two ways to get customers in a competitive market; either develop new customers or take them away from your competitors. Also, study the competition for ways to become cooperators rather than rivals by buying or selling from each other.
How do I make a Sales Projection?
Now that you have found what people are willing to buy you need to make a sales forecast. After studying the industry, consumer profile and the competition you have enough information to do some simple projections. For each of your chosen target markets, estimate your market share in number of customers. Based on consumer behavior, how often do they buy per year? What is the average dollar amount of each purchase? Multiply those three numbers to project sales volume for each target market.
To get better numbers for your projects try asking your competitors – or locating a business similar to yours, in a community like yours, that’s far enough away so you won’t be considered a competitor, then ask them. Better yet, go there. Take the owner to lunch. Walk around, observe, take advantage of good ideas, and avoid the bad. Then go back home and forecast your sales!
When do I discuss my Product and Services?
Once you’ve projected sales based on what you think your customers will buy you’re ready to talk about your product or service. The projections should help determine the products and services you will sell. Describe them in some detail. Briefly summarize your analysis of your competition and your competitive advantage. You might also want to briefly summarize your pricing structure.
What is this "supply and demand" thing?
You did the market research. If customers don’t demand the products and services you want to supply, then they won’t buy them. That’s the basis of the free enterprise system and the economic model. Informed business people determine what consumers demand and then supply it to them. It’s a lot more effective and efficient to sell people what they want to buy than it is to "create" market demand. That leads us to the next part of the planning process: the Feasibility Study.
What is a Feasibility Study?
The question remains: is this business financially feasible? You’ve already projected sales. How much will it cost to achieve that level of sales? Start with fixed costs like rent, utilities, insurance and salaries. Then calculate the variable costs of sales including cost of goods sold, hourly wages, shipping, etc. Subtract the cost of sales from the sales forecast. This is your Gross Margin. Subtract the fixed costs you identified from the Gross Margin. If the remainder is less than zero, then the project is not feasible. If the number is positive, is it large enough to justify the risk? Starting or growing a business requires financial risk. If the business idea does not meet your financial requirements, then invest your money in something that does.
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What is a Marketing Strategy?
The Marketing Strategy is a plan for selling your products and services to identified target markets. Let’s review. You studied the industry, identified target markets, and determined their buying behaviors. That defines the products and services you will supply to meet pre-determined demand.
Here is a Marketing Plan model that may help. The 7 Ps of Marketing includes the following:
1. Profile (of the industry and consumers) => Market Analysis
2. Products and Services
3. Position
4. Pricing
5. Payment => Marketing Strategy
6. Placement
7. Promotion
This Marketing Strategy plan is made of five components: Position, Pricing, Payment, Placement and Promotion. To develop your Marketing Strategy, you must determine "how the customer wants it" for each component.
Your Position in the marketplace includes the business image and competitive advantage or difference. The best advantage is an in-depth understanding of your customers and the closest possible match of products and services to meet their demands. When a customer enters your store, catalog or website they need to feel that they are in the right place to satisfy their needs.
Your Pricing strategy must satisfy three criteria.
1. The customer must believe the price is fair and reasonable.
2. The price must include a fair profit
3. Price reflects your position with regard to competitors.
The Payment strategy includes methods of payment and credit terms and policies. Remember, the best answer is "the way the customer wants it. If you don’t provide the payment options your customers demand, their purchase may be made from your competitors.
Placement includes all aspects of your distribution channels including shipping, storage, inventory and display. Are you a retailer with a store front whose customers come to you and take their products home or do you ship them? Are you a "virtual retailer and take orders for your merchandise and ship the sale? How do you ship your merchandise? Do you have inventory on hand or do you receive an order and have the products shipped by your supplier {drop shipped)? Who are your suppliers? Are they wholesalers or the producer? Again the answer to the question of how to get your products and services to your customer is "the way the customer wants it!
Promotion. The first assumption most people have about a Marketing Plan is that it is all about promotion and advertising. Please note that it is the last component of your Marketing Plan. Until you have identified your target customers, determined the appropriate bundle of products and services, defined you market position, calculated pricing and set up your payment and distribution systems you won’t know how, what, where, when and why to promote and advertise! After developing the rest of the Marketing Plan promotion and advertising becomes transparent and obvious. There are two parts to promotion and advertising; the message and the medium. The message should address the needs and wants of your target customer. Identify their problems, then apply them to your business to provide a solution. Your message should inform, persuade or remind your customers. Select the media that your target customers are most likely to read, see or hear. Keep in mind that a well trained and customer-oriented sales staff is the best marketing investment you can make.
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What is an Operation Plan?
An Operation Plan consists of the following sections. First, a complete set of projected financial statements which includes a cash flow statement, a profit and loss statement, and a balance sheet. Next, a schedule of events should be developed to guide starting and growing your business with the financial constraints you identified in your financial statements. Finally, a management plan and plan summary need to be developed.
Your local Washington Small Business Development Center Certified Business Advisor (CBA) can assist you in preparing a business plan and will be particularly helpful in preparing your financial statements. See the listing of Washington CBAs on this website.
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How do I create a Cash Flow Statement?
All your projections should be based on careful research, not casual guesswork. Keep notes detailing your major assumptions, and include the notes as an attachment to your projections. Your projections will show how you intend to prosper by having revenues exceed expenses. Now you must show that you can pay your bills while prospering. Bills are paid with cash, not with profits. A cash flow projection is nothing more than a forward look at your checking account. Formats are readily available. The following is just one website that offers free templates for most of the financial statements and projections discussed: Microsoft Office Templates The WSBDC offers this for information purposes only and does not endorse individual products or companies.
You have projected sales in your Marketing Plan and costs in your Feasibility Study. Now it is time to put the "timing element into your plan. A Cash Flow projection simply states when income is received and when expenses are paid.
After entering these sales by department or category, enter the Cost of Goods Sold (COGS) for each category of sales for each month. COGS are those expenses directly related to producing or purchasing the product/service you sell. For example: for retailers, COGS is the cost of buying merchandise; for manufacturers and construction, it is direct production, labor, and materials; for service businesses, it is production, labor, and materials. Breaking COGS down into departments will help you see which parts of the business deliver the most profit per sales dollar.
Now estimate operating expenses month by month for the year. These necessary expenses are not directly related to buying or making your product/service. They are also known as overhead items. Examples are: telephone, rent, insurance, taxes, and the salaries of office, sales, and management personnel. If adequate, use the same categories of expense you use (or plan to use) in the regular Income Statements you get from your accountant. This makes it easier to draw on history in making projections, and it makes it easier to compare your actual statements to your plan as time goes by.
By forecasting the status of your bank account, the Cash Flow tells you if your working capital reserves are adequate. Budgeting does not create sales or put money in the bank, but it can help put you in control. When you know how much the off season will draw down your account, when you begin negotiating that new bank loan months in advance because you can foresee the need, then you have gained a little more control over your own destiny.
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What is a Profit and Loss Statement, a Balance Sheet, and a Schedule of Events?
A Profit and Loss Statement answers the question whether or not you made any profit. It considers when a sale is made and an expense incurred rather than when the check is received or written. Formats are readily available by accessing Microsoft Office Templates.
Some items belong to the Profit and Loss while others belong to the Cash Flow Statements. Depreciation, for example, is a real business expense, but not an item of cash flow (you never write a check for depreciation). Prepaid expenses are a Cash Flow item but only the portion for the current period is recorded on the Profit and Loss. On the other hand, the principle part of a loan repayment is not an expense (only the interest portion is), but it definitely takes cash out of the business, and therefore needs to be shown on the cash flow projection.
Your plan should include a projected balance sheet showing assets (things owned), liabilities (debts), and owner’s equity. Formats are readily available at Microsoft Office Templates
If yours is a startup business, the balance sheet should show your financial position on opening day and at the end of subsequent years. Existing firms should do projected year-end balance sheets as well.
A Schedule of Events is a timeline to guide you in developing and growing your business. It lists chronologically the various critical actions and events that must occur to bring your business to fruition. Be sure to assign real, attainable dates to each action or event.
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Do I need a management plan?
The Management Plan reveals who will be responsible for the various management functions to keep the business running efficiently. It further demonstrates how that individual has the experience and/or training to accomplish each function. It is necessary to address who will do the planning function, the organizing function, the directing function, and the controlling function. Include an organizational chart to visually present your organization and responsibilities.
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What is a Plan Summary?
The Plan Summary is developed primarily for others to read. It includes a Table of Contents, an Executive Summary, a Sources and Uses of Funds Statement, a History and Description of Your Business, and Resumes of Key Personnel.
The "Executive Summary is a concise summary of each section of the business plan. It is usually no longer than two pages and enables outside readers to get a picture of your business in a very brief time. This is your opportunity to capture the interest of a lender or investor!
The "History and Description of Your Business" explains the history of your business (if you have one), your concept, what you do, and briefly describes your customer from your marketing plan. Further, it discloses your location and key strengths. In addition, it introduces the business owners and the ownership structure.
The "Sources and Uses of Funds Statement" is simply a listing of all the sources of funds. This would include the owner’s investment, others investment, loans, and any other sources of funds for the business. Uses should be divided into segments such as real estate and buildings, improvements, capital equipment, location and administrative expenses, inventory, advertising, contingencies, and working capital. It should be clear that the sources should equal the uses!
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Is there a difference in how I develop and how I present the Business Plan?
YES! The development model is designed to help you assemble the information necessary to help YOU bring together the information necessary to start and or grow YOUR business. If you plan to seek funding or other support, the information should be presented in a manner that is easily read and understood by someone who has no idea about your business. Most lenders or investors would find the following "presentation format" appealing. It tells them who you are and what you want within three pages. It may look like a lot of work, but relax. You have the work done. Now it’s just a matter of cutting and pasting to make your business and its needs more presentable!
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Should I use business plan software?
While many of the available business plan programs provide usable products, they tend to provide a more "canned" product. In addition, by being a "fill in the blank" process, there is a danger that the writer will end up with fluff rather than investigating and thoroughly planning for his business. Investors frequently recognize canned programs.
Where can I get additional help developing my business plan?
In addition to SCORE (Counselors to America’s Small Business) and assistance through your Washington Small Business Development Network, there are a multitude of information resources, both public and private, available through the internet or public libraries. Below is a sampling of those resources. These are provided for information purposes only.
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