Why write a business plan?

Article By: Jeffrey Skolnick, CPA, M.S. Taxation

A business plan is going to serve as a blueprint to the way you run your business. By far the biggest mistake I see individuals make when they decide to open their own business is they do it without enough thought. Let’s face it, writing a business plan is not fun, and most people go into business because they have a passion for something and very few people have a passion for anything as tedious as a business plan.

One reason you should do one, even if it is not a long plan is that it will require you to think about some things that are vital to your existence and should help you map out your future strategy.  Another reason may be if you are looking to raise capital, either through investors or borrowing, then you will need to provide information to the potential investors or lenders so that they are comfortable with going forward with you.  Keep in mind most startup businesses do not make it, and while I don’t know the statistical data, I can guarantee you those that plan will vastly increase their chances of success.

Where can I find out more about business plans?

There are some very good resources to choose from that can help you write a business plan. There are software packages that can walk you through the process and guide you to what information you require, and it will also require some research on your part. I believe the initial research is one of the biggest keys to your success, and I will explain a little more as we move along. While there are a lot of software packages, I also recommend searching the U.S. Small Business Administration website www.sba.gov.  This is a great free resource, everything is written in easy to understand language (as opposed to legalese), and there is some great information. I believe by spending just a little time there; you can gain some clarity on what you are trying to accomplish.

What is included in a business plan?

A traditional business plan will contain the following key elements:

Executive summary. This is going to a brief description ofwhat your business is, what need you are going to fulfill, and why you believe you will be successful. This is a summary of the overall plan. The details will be put forth in the remaining sections. Think of this as your elevator pitch or 30-second story. In other words, you want to explain what you do, how you do it, and why you do it very briefly.  

Company description. As the title suggests, this is information about your company. You will explain:

• Your products and services
• Your target market
• Your ownership, both from the type of legal entity you are (i.e., sole proprietor, partnership or corporation) and who you owners are as well as their experience
• Any advantages you may have in the market

This is going to be a detailed explanation of who you are and why you will succeed. I stress that even if you are not currently looking for investors or lenders that you approach this section as if you were seeking one or both of these groups. This will force you to think about your business in a more structured manner.

Market analysis. In my opinion, one of the most important areas you can think about. I am reminded of the old Honeymooners episode where Alice is scolding Ralph on some of his past ventures, and she asks about the time he invested in a parking lot near the new movie theater? He answers with, “How did I know they were building a drive-in theater?” While that is funny, you want to look at the market and see who your competition is. How will you compete and what will you need to do to be successful.

Organization and management. This area will explain the type of entity structure you will have (sole proprietorship, partnership, LLC, S or C corporation) and an organizational chart. This is also the area where you would explain the major players and possibly their qualifications.

Service or product line. Think of this as if you were going to appear on shark tank. You will explain either what your services are or what products you sell. Make sure you are thinking about the benefits to your customers/clients. Nobody spends money to benefit you. People spend money because they see value to themselves.

Marketing and sales. This section, while it will vary greatly depending on several variables such as business type or geographic region to name a couple, lays out how you will attract clients/customers.  Marketing is an area that is a constantly changing trial and error pathway. How many times have you seen or heard companies asking how you heard about them? These companies are spending money on advertising and attempting to determine the effectiveness of such advertising.

Funding requirements. Another key area that I see that causes business owners huge headaches. It is key that you understand how much money your business will require and how you are going to use it. Again, let’s go back to the show shark tank. The panelists will almost always ask, “What will you use the money for?” No lender or investor wants to give his or her hard-earned money to someone who is “winging it.”  If you’re a brick and mortar store, you may require funding for equipment, advertising, personnel, etc. 

You will also look at your business to determine your slow and busy times during the year. In my business, for example, I have much greater cash flow February through May then I have in August and September.  It is important to think of all the money you will need for funding capital expenditures and operations. Very few thing will make you less prepared then asking for money and then six months later asking for more because you didn’t anticipate correctly.

Financial projections. You will want to show projections to potential investors or lenders to give them a reason to give you their money. If your business is established you will use your current financial statements (balance sheet, income statement and cash flows statement). You will also show your projections over the next five years or so. New businesses will obviously only show projected numbers. When making financial projections you can should be more detailed and more accurate with the near term (next year or two).

These are the  basic areas of a business plan.  The SBA also lists an Appendix section for additional materials requested but I’m not going to cover that here.  The SBA also mentions a “lean startup format” which is a much simpler version of what I just discussed. Theses are sometimes referred to as a Business Model Canvas.

Conclusion. Although not typically the first thought on a new owners mind (these individuals are usually focused on their products or services), having a business plan will increase your odds of success greatly. If the venture is worthwhile, then please spend the time to make sure your foundation is solid before you build your house.

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