Your business plan outlines what your business does and what you are trying to achieve. It explains what the market opportunity is, what makes your business special and how you will make it a success.
Writing a business plan helps you:
- check that your business idea makes sense
- plan your sales, marketing and business operations
- identify potential problems and how to overcome them
- set out your objectives and the financial return you expect
- work out what financing you need
- convince other people to back your business
1. Why write a business plan?
Writing a business plan helps you think about what you are doing
- The plan sets out your strategy and action plan for the next one to three years, or sometimes longer.
- As part of the process, you set concrete objectives and plan how you will achieve them.
- Writing a business plan helps you focus and develop your ideas. Priorities are identified. Non-priorities are dropped, saving precious time.
- Putting the plan in writing makes it easier to spot any gaps where you have more work to do.
- Once written, the plan is a benchmark for the performance of the business.
- By involving your employees in the planning process, you can build a successful, committed team.
You may need a business plan to explain your idea to other people
- A business plan is essential if you are raising finance from a bank or outside investors.
- A good plan can help you attract new senior management, or business partners such as distributors and agents.
- You should tailor your plan to the target audience. For example, you may want the plan to 'sell' the business to your bank manager or investors.
- Ask the intended recipient if there are any specific issues they want the plan to address or a template you should follow.
2. How to write a business plan
Base your business plan on accurate, detailed information where possible. But do not include all the detail in the plan. Leave the detail for operational or marketing plans.
Keep the plan short
- Focus on what the reader needs to know.
- Cut out any waffle.
- Make sure there are no spelling mistakes.
- Detailed business plans are often quickly shelved because they are difficult to use on an ongoing basis.
Include any detailed information you need in an appendix
For example, you might want:
- detailed financial forecasts and assumptions
- market research data that backs up what you say
- CVs of key personnel (essential if you are seeking outside funding)
- product literature or technical specifications
Base your business plan on reality, or it may be counterproductive
- Over-optimistic forecasts can lead to increased overheads followed by a cash flow crisis and drastic cost-cutting.
- 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 can be damaged.
Make the plan professional
- 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.
- Use charts, if helpful.
Even if the plan is for internal use only, write it as if it were aimed at an outsider
- Include company or product literature as an appendix.
- Give details about the history and current status of the business.
Review your business plan
- Read through the plan from your target reader's point of view. For example, try to imagine the impression the plan will make on your bank manager.
- Check the plan is realistic. Include evidence to back up what you say (perhaps in the appendix) or provide evidence if needed.
- Make sure you assess the risks. What might go wrong (eg if your main supplier closes down or you lose a key customer) and what would you do about it?
- Concentrate on the executive summary. People often make provisional judgements based on this. Only then do they read the rest of the plan to confirm their decision.
- Show the plan to friends, business peers and expert advisers for comments. Which parts did they not understand or find unconvincing?
3. Your business and products
Explain the history of the business
- When did it start trading and what progress has it made to date?
- If the business is just starting up, what is your personal industry background and what progress towards launching the business has been made?
- Who owned the business originally?
- What is the current ownership structure?
Describe what your product or service is, avoiding technical jargon if possible
- In general, what makes your product or service different?
- What benefits does it offer? What are its disadvantages and how will you address these?
- What changes and improvements are you planning?
Explain any key features of the industry
- For example, any special regulations, whether the industry is dominated by a few large companies or any major changes in technology.
4. Your market and competition
Describe the market in which you sell
- Highlight the segments of the market in which you compete. What are the key characteristics of customers in each segment and what influences their purchasing decisions?
- 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 is the outlook for each important market segment?
Describe the nature and distribution of existing customers
- Do they fit the profile of the chosen market segment? If not, why not?
- Are sales largely made to one or two major customers?
- If you are a new start-up, do you have any confirmed orders and who are your best prospects?
Outline the main competition
- What are the competing products or services? Who supplies them?
- What are their advantages and disadvantages compared to you? For example, price, quality, distribution.
- Why will customers buy your product or service instead? How will your competitors react to losing business and how you will respond?
- Never openly criticise or underestimate competitors.
5. Your marketing and sales strategy
Where do you position your product or service in the market?
- Is it high quality and high price?
- Is it marketed as a specialist product due to a particular feature?
- What unique benefits does it offer customers? For example, product reliability or customer service.
- Which of these benefits are you going to highlight?
What is your pricing policy?
- Explain how price-sensitive your customers are.
- Look at each product or market segment in turn. Identify where you make your profits and where it may be possible to increase margins or sales or cut costs. Set your pricing accordingly.
How do you promote your product or service?
- Each market segment will have one or two promotional methods that work best. For example, social media marketing, direct marketing, advertising or PR.
- If you are considering a new marketing strategy, start small. A failed investment in marketing can be costly.
What sales channels do you use to reach your target customers?
- For example, do you sell directly to the customer, or through retailers or agents? Do you sell online?
- 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 channels.
How do you do your selling?
- Look at the cost-efficiency of each of your sales methods. For example, online sales, in person, through an agent or using telesales.
- Include all the hidden costs, such as management time when calculating prices or return on investment.
- Explain how long it takes to make sales (and to get paid for them), what the average sales value is and how likely customers are to give repeat orders.
6. Management and personnel structure
Set out the structure and key skills and experience of the management team and the staff
- Clarify how you cover the key areas of production, sales, marketing, finance and administration.
- Address any areas of deficiency, and your plans to cover this weakness.
- Explain your recruitment and training plans, 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
- Show how committed you and other members of the management team are. For example, how much you have invested in the business.
- Consider how you would survive the loss of a key member of the team.
- Note any unusual upward pressure on pay levels.
- Spell out any plans to improve or maintain motivation.
7. Your business operations
Look at the capacity and efficiency of your operations, and any planned improvements.
What premises does the business have?
- Do your business premises meet your current and future needs? What are your long-term commitments to property?
- What are the advantages and disadvantages of the present location? Should the business expand or move?
What production facilities do you have and how is production organised?
- How modern is the equipment?
- What is the capacity of the current facilities compared with existing and forecast demand?
- Who are your key suppliers? How do you select and manage them?
What management information systems are in place?
- For example, management accounts, sales, stock control and quality control.
- Are they reliable? Can they deal with any proposed expansion?
- A financier will be very concerned if management information systems are inadequate. Management of a business is always limited by the quality of the information available.
Are your IT systems reliable?
- Is IT a key strength (or weakness) of your business? The development of IT systems to help your business is usually an important issue.
What quality or regulatory standards does the business conform to?
- For example, ISO 9000 or CE approval.
8. Financial forecasts
Your financial forecasts translate what you have said about your business into numbers.
Set out 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 groups of customers.
- Show the gross margin for each sales component. 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.
- Provide an up-to-date balance sheet, and a profit and loss account.
- Explain the reasons for movements in profitability, working capital and cash flow. Compare them with industry norms.
Provide forecasts for the next three (or even five) years
- The sophistication of your forecasts should reflect the sophistication of your business. A small business may only need sales, profit and cash flow budgets.
- 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, to make comparison easier.
- Clearly state the assumptions behind the forecasts. These should tie in with what you say in the rest of the plan. For example, if the plan says that the market is becoming more competitive, profit margins should probably be falling.
- Be realistic about forecasts in new markets. For example, how much resource can you devote to selling, what success rate can you expect and how long will it take to convince new customers?
- Look at the overall trends of historical and forecast numbers. Are they believable? Do the forecasts allow for the possibility of problems and delays in payments that could affect cash flow?
- Consider 'what-if' scenarios. For example, consider what will happen to your cash flow if sales are 20% lower than forecast (or 15% higher).
Put detailed financial forecasts in an appendix at the end
Include a detailed list of assumptions. For example:
- the profit margin on each product
- how long it takes to collect payment from debtors
- what credit suppliers will offer you
- what financing you are expecting and the interest rate you will pay
Use the cash flow forecast to predict any financing requirements
- Add an extra contingency element onto the funding requirement shown in the forecast (perhaps 10-20%). Think about what mid-month peaks might be.
- Identify what types of financing you want. For example, long-term loans or an increased overdraft facility.
- Include the likely interest or dividend costs of any new finance.
- Carry out sensitivity tests on the cash required by changing key factors, such as sales or margin. Note the outcomes.
- Explain why the financing is required and what it will be used for.
If necessary, get help
- Small business advisers at banks and business support organisations may help you put together financial forecasts free of charge.
9. SWOT analysis
A SWOT analysis helps show that you really understand your business and the key external factors that you need to deal with.
Set out a one-page analysis of strengths, weaknesses, opportunities and threats
- Strengths might include brand name, quality of product, or management experience.
- Weaknesses might be lack of finance, or reliance on just 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.
Driving your business forward
Identify what makes you better than the competition
- Think about what the key ingredients of your future success will be and how you will strengthen your position in the market.
Establish your overall business aims
- Where do you realistically intend to be in three years' time?
Decide on half a dozen key objectives that will make a significant difference
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
Set clear targets
- You should know exactly what you want to achieve, by when.
Work out how you will reach these targets
- Look at each aspect of your business in turn and create a step-by-step action plan for it.
- Get help preparing a business plan and financial forecasts from your local enterprise agency.
- Find an ICAEW chartered accountant or an ACCA accountancy firm for help with financial forecasting and business planning.
- Find a trade association relevant to your sector through the Trade Association Forum.