How Important is a Written Business Plan?

At least half of the many small business owners I work with do not have a written business plan. When I ask them why, they most often reply by stating their belief that a business plan is only useful when a company is looking for investors.  Others believe that their business is so simple (for example, a taco stand), that it doesn’t even need a plan.

I happen to disagree.  Although a written business plan is a vital prerequisite to securing financing, a well-thought out plan can be an invaluable tool, because writing one requires you to focus on where you are and where you want to be. Did you fall short of your first year income forecasts?  Writing a plan after the fact will help you determine why you didn’t meet that goal.  Was it a problem with your marketing?  Did you underestimate your competition?  Are your costs out of whack?  All of this information will greatly influence how you continue to run your business.

Many business consultants argue that a business plan is simply a resume for your business, and should read like a resume.  However, I believe that when written well, a business plan should read like a novel; a narrative with a beginning, a middle, and an end, complete with defined chapters, engaging characters, and a powerful message.

Keeping with the novel analogy, a business plan can be further categorized as a work of fiction (if the business hasn’t yet been started), or a biography (if it’s already in operation).  A fictional plan tells the story of a man or woman with a vision; a dream that will change the world in some way, and what the protagonist must do in order to make that dream come true.  It describes the many challenges that need to be overcome, the sacrifices that need to be made, and (naturally) must include a happy ending in the form of financial success.  A biographical plan tells the fascinating history of a successful company and the people who made it possible.  It describes the challenges they overcame in bringing their dreams to fruition, their vision of the future, and what they must do to achieve that vision.

Of course, we’re not all Stephen King,  but the good news is that outlines for the really important chapters have already been prepared.  All you have to do is flesh out the story.  Be certain to include a table of contents separated into sections and chapters.  For purposes of illustration, I’ve provided samples sections and chapters below.

PART ONE:  EXECUTIVE SUMMARY

Here you’ll be introducing all of the major characters and the vision that united them.  If the story is a biography, it helps set the stage by making the reader familiar with the history of the company; where and when it was born, and how it grew up.  To tell the story properly, an Executive Summary should include the following chapters:

Chapter 1:  Mission. This a paragraph that sums up what the business is, or what you imagine it will be.  It needs to be focused and concise, and leave the reader with a basic understanding of what the story that follows is going to be about.

Chapter 2: Background. The next few paragraphs should include some background facts.  Things like where the company is or will be located, the names and history of the founders, how many employees it has, the products it sells, and who it sells them to.

Chapter 3:  The Industry and Target Market. Briefly touch on your industry.  If you sell pizza, tell your readers something like “Pizza is an iconic American favorite, enjoyed by millions of people all over the world.  Quality pizza is always in high demand regardless of age, ethnicity, wealth, or education.  Everyone loves great pizza.”

Chapter 4:  The Key to Success. You’ve already described your vision, your company, product, your industry, and the people that you sell to.  Now state why you’re the best.

PART TWO:  THE INDUSTRY

In Part Two, you’ll be discussing your industry in considerable detail, to both highlight your knowledge of your market and to help educate your reader.  To properly write this section, you’ll need to undertake a bit of research, and an excellent place to start is the official website of the U.S. Department of Labor’s Bureau of Labor Statistics at www.bls.gov.

Chapter 5: Industry Description and Outlook. In this chapter, you’ll describe your industry in terms of its size, historic growth rate, trends, and general characteristics.  For example, if you’re in the dry cleaning industry, a visit to this page on www.bls.gov reveals that your industry employed 320,160 people in 2009.

Chapter 6:  Target Market. Now that the reader understands your industry, you should talk about your target market, which is the specific group of customers that you want to focus on.  Sure, you’d probably sell your product to anyone willing to buy it, but in this section it’s important to narrow it down and describe a specific type of “ideal” customer.  In the case of a dry-cleaning business, you may want to focus on the hotel and restaurant industry, rather than consumers, or maybe a certain type of consumer.  Be certain to discuss why you’re focusing on that particular target, and what distinguishes your target market from the overall pool of potential customers.

Example: “XYZ Dry Cleaning Services focuses its efforts on a target market that consists of young, upwardly mobile professionals (doctors, attorneys, accountants, stockbrokers, etc.).  These occupations require formal business attire, and, because younger workers have not yet accumulated the financial resources necessary to purchase a large wardrobe, they have a greater and more frequent need for our services.”  Go deeper and discuss the size and the specific needs of this target segment, and how you address them.

Example:  “Younger professionals frequently work longer hours, and have less free time to visit the drycleaner to drop off and pick up clothing.  We have therefore structured our business hours around their schedule, and are open 24 hours a day to ensure accessibility”.

PART THREE:  THE PRODUCT

In this section, you’ll discuss the product or service you provide in great detail.

Chapter 7:  Description. Describe what it is you’re making or selling in greater detail than did in the Executive Summary.   If it’s a new or unique product or service, discuss its origin, and whether it’s protected by patent or copyright.   If you own a pizza restaurant, add a paragraph that fleshes out the origin and history of your core offering.  People like to learn things, so take this opportunity to educate them.

Example: “In one form or another, pizza was a popular peasant meal in Italy for thousands of years.  Ancient Romans would often have meals consisting of flat bread topped with sauces and other food items.  The invention of the pizza that we’re familiar with today started in Naples in 1830, at a restaurant called the Port Alba, which remains in operation to this date.  The original modern was the Margarita, made with flat bread, pasted with tomato and topped with cheese.”

Chapter 8:  Manufacturing and Distribution. Discuss the raw materials that go into its manufacture, and various aspects of the supply chain. For a pizza place, this will be a few basic sentences, but for more complicated products, this may be the longest section of the Plan.

PART FOUR:  SALES AND MARKETING

This part of your story talks about what you’re doing to reach your target market, and what you do after you reach them.

Chapter 9:  Marketing Plan. You need to have a plan that discusses how you’ll be reaching your target market.  What type of tactics will you employ to reach your customers?  Direct mail, e-mail, print ads, Internet promotions, public relations, brochures, catalogs, and flyers should all be a part of your strategy.

Chapter 10:  Sales Plan. Marketing is one thing, but sales are another.  Who’s actually interacting with your customers?  Do you have an internal sales force, and if so, how are they managed and trained?  Are there particular scripts or selling methods that you endorse?  What sort of customer management and follow up tools do you use?  Talk about historic sales, and what you’ll do to increase them.

PART FIVE:  ORGANIZATION AND MANAGEMENT

In this section, you’ll discuss your company’s organizational structure (corporation, LLC, etc.).  You’ll talk about who owns it, who manages it, and who works for it.  All of the moving parts that make up the living entity that is your company.

Chapter 11: Ownership and Organizational Structure. Describe the legal structure of your business entity, locations, and the number of employees you have. Have you incorporated your business? If so, is it a C or S corporation? Is it an LLC, a general or limited partnership, or are you a sole proprietor?   Be certain to include the names of the owners, their ownership percentages, etc.

Chapter 12:  Management Profiles. This is one of the most crucial chapters of your plan- the people behind the logo.  Let your readers know who they are; discuss their backgrounds and qualifications, their track records and education.  If these are not very impressive, then focus on what a manager has accomplished at your company. Discuss how their efforts have increased sales, or contributed to the company’s growth.  If you can’t think of anything to say about a member of your management team, then this is a pretty good opportunity to reassess their position.

Chapter 13:  Officers and Directors. People like to know that there is more to a company than one or two people.  If you don’t have a board of directors per se, you may want to consider forming an unpaid advisory board, to enhance your company and your plan by including a group of successful businesspeople that understand your business and believe in it.

PART FIVE:  FINANCIAL INFORMATION

The financial information you provide should be clear and assembled in accordance with Generally Accepted Accounting Principles (GAAP).

Chapter 14:  Historical Financial Data.

If your business is already established, you should supply historical financial information in the form of income statements, balance sheets, and cash flow statements for each year you have been in business (usually for up to three to five years).  Be certain to include hard assets (real estate, equipment, and inventory).

Chapter 15:  Prospective Financial Data.

In this chapter, you’ll discuss how your business will grow over the next five years, based on the background and plans you’ve already discussed. Each year’s documents should include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, you should supply monthly or quarterly projections. After that, you can stretch it to quarterly and/or yearly projections for years two through five.

PART SIX:  FUNDING REQUIREMENTS

If you need money to start or expand your business, here’s where you get into it.  However, you should never ask for money in your plan.  Instead, structure your sentences in a way that leaves the reader with the impression that he or she is being given a special opportunity to participate in a unique and profitable business.  In other words, you’re going forward regardless of whether the reader contributes a penny, and if they miss the boat, it’s their loss.

Chapter 16:  Current and Future Requirements. Outline what you need now, and what you’ll need over the next few years to meet the goals you’ve already detailed in the plan.  Discuss how you’ll allocate every dime.  Will you be making capital expenditures?  Is it for working capital?   Marketing?  A key acquisition?  Make certain to spell it out.

Chapter 17:  Nature of Investment. Discuss what kind of investment opportunity you’re offering the reader. Are you looking for a loan, and if so, what sort of collateral can you provide?  What interest rate are you offering, and how will it be paid?  Are you looking for an equity partner who will share the risks and rewards of the business?  In either event, make certain that you know what kind of investment you’re asking for.

PART SEVEN:  CONCLUSION

Always wrap up your story with a positive summary of your business, together with its accomplishments and goals.  This will be structured along the lines of the executive summary, except you’ll also reference your funding requirements and what your business will look like after the capital infusion.  The conclusion serves to reinforce the value proposition you discussed in the previous funding requirements section.



Author: Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.

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