So, you have an awesome idea for a business. You know exactly what products and services you want to provide consumers in your target markets. Moreover, you are confident and ready to be your own boss. What next?
Well, whether you’re planning to open a donut shop, beauty supply store, or serve the best homemade ice cream sundae in your new pink colored store front, you will need to clarify and explain why your business is needed and how it is different from your competitors. Here are 9 critical elements of a business plan every aspiring entrepreneur should understand in 2020.
Why is a Business Plan important?
A well written business plan is important because it paints a picture to potential partners, investors (most importantly lenders) of your company’s structure and goals. Furthermore, it serves as a roadmap guiding the launch and growth of your new business. If you are looking to open up shop, you’ll need to write a business plan! You should include the following 9 critical elements in your plan.
1. The Executive Summary
This section is the most important part of your plan. Because often, it’s the only part that a prospective lender or investor reads before making a decision whether or not to move forward in reading the rest of your plan. It should fully convey your enthusiasm for your business ideas and get readers as excited about your company as you are.
Since it’s meant to highlight what you intend to discuss in the rest of the plan, many of my mentors have suggested to come back and write this section last. The U.S. Small Business Administration suggests the same. After reading the Executive Summary, the reader should have a basic understanding of your business. They should be excited about its potential and should be interested enough to read further.
2. Company Description
The second section in your business plan is your company’s description. This section outlines the basic elements of your business such as your mission statement, philosophies and vision, company goals, target markets, industry and legal structure.
Your mission statement is a brief explanation of your company’s reason for existing. The mission statement can be as short as a marketing tag line or more descriptive. After reading the company description, the reader should have a basic understanding of your business’s mission, vision, goals, target market, competitive landscape and legal structure.
3. What Are Your Products & Services?
In this section you will explain and describe your products and services expanding on what was described in the executive summary and your company description. The individuals reading this portion of your business plan should know exactly what you’re planning to create and sell, how long your products are supposed to last, and how they’ll meet an existing need.
Moreover, every business needs to solve a problem that its customers face. It’s important to explain what the problem is and how your products and services will solve consumer problems. What are its benefits, features and unique selling proposition? Your company won’t be the only solution (every business has competitors), but you need to explain why your solution is better than the others, targets a customer base your competitors are ignoring, or has some other characteristic that gives your business a competitive edge.
4. Marketing Plan
This section provides details on your industry, the competitive landscape, your target market, and how you will market your business to consumers. There are two kinds of market research: primary and secondary.
Primary market research is information you gather yourself. This could include going online or driving around town to identify competitors, interviewing or surveying people who fit the profile of your target customers, or doing traffic counts at a retail location you’re considering.
Secondary market research is information from sources such as trade organizations and journals, magazines and newspapers, census data and demographic profiles. You can find this information online, at libraries, from chambers of commerce, from vendors who sell to your industry, or from government agencies.
After reading the Marketing Plan section, the reader should understand who your target customers are, how you plan to market to them, what sales and distribution channels you will use, and how you will position your product/service relative to the competition.
5. Operational Plan
This section explains the daily operation of your business, including its location, equipment, personnel and processes. How will you produce your product or deliver your services? Describe your production methods, the equipment you’ll use, and how much it will cost to produce what you sell. After reading the Operational Plan section, the reader should understand how your business will operate on a day-to-day basis.
6. Management & Organization
This section should give readers an understanding of the people behind your business, their roles and responsibilities, and their prior experience. If you’re using your business plan to get financing, know that investors and lenders carefully assess whether you have a qualified management team.
Develop and include an organizational chart. This should include both roles you’ve already filled and roles you plan to fill in the future. After reading the Management & Organization section, the reader should feel confident that you have a qualified team leading your business.
7. Startup Expenses & Capitalization
In this section, detail the expenses involved in opening your company for business and how much capital you’ll need. Estimating startup expenses as accurately as possible helps you gather enough startup money. In the body of this section, be sure to explain all the assumptions behind the figures percentage of ownership each receives in return.
Be sure to include extra capital for unexpected expenses. Opening a new business almost always ends up costing more than expected, and you need to be prepared. After reading the Startup Expenses & Capitalization section, the reader should know how much money is needed to start the business and how well capitalized you are.
8. Financial Plan
Your financial plan is perhaps the most important element of your business plan. Lenders and investors will review it with great detail. Developing your financial plan helps you set financial goals for your startup and assess its financing needs.
- The 12-month profit and loss projection is the centerpiece of your business plan. Be sure to explain the assumptions behind the numbers in your P&L. Keep detailed notes about how you came up with these figures. You may need this information to answer questions from potential financing sources.
- Include an optional 3-year profit & loss projection. A three-year profit and loss projection is not essential to a business plan. However, you may want to create one if you expect your business’s financials to change substantially after the first year, or if investors or lenders require it.
- The cash flow statement tracks how much cash your business has on hand at any given time. Once your business is up and running, you’ll want to keep close tabs on your cash flow statement. Think of the cash flow projection as a forecast for your business checking account. It details when you need to spend money on things such as inventory, rent, payroll, and when you expect to receive payments from customers and clients. After reading the Financial Plan section, the reader should understand the assumptions behind your financial projections and be able to judge whether these projections are realistic.
Don’t slow your readers down by cluttering your business plan with supporting documents, such as contracts or licenses. Instead, put these documents in the Appendices, and refer to them in the body of the plan so readers can find them if needed. You can also include any other materials that will give readers a fuller picture of your business or support the projections and assumptions you make in your plan
At this point don’t forget to go back and write your Executive Summary.
Finally, a good business plan is clear and concise.
A person outside of your industry should be able to read the 9 critical elements of your business plan and fully understand them. Avoid overusing industry jargon and terminology. Most of the time involved in writing your plan should be spent researching, making sure to document your research and findings, and including the sources of any information you include in the plan.
Avoid making unsubstantiated claims or sweeping statements. Investors, lenders, and others reading your plan will want to see realistic projections and expect your assumptions to be supported with facts. It’s very important that aspiring entrepreneurs understand research is a critical component of a solid business plan. Nail these 9 critical elements of a business plan and you’ll be well on your way to business ownership.