Business Plan Tips
Entrepreneurs and business managers are often so preoccupied with immediate issues that they lose sight of their ultimate objectives. That's why a preparation of a strategic plan is a virtual necessity. This may not be a recipe for success, but without it a business is much more likely to fail.
A strategic plan is not the same thing as an operational plan. The former should be visionary, conceptual and directional in contrast to an operational plan which is likely to be shorter term, tactical, focused, implementable and measurable. As an example, compare the process of planning a vacation (where, when, duration, budget, who goes, how travel are all strategic issues) with the final preparations (tasks, deadlines, funding, weather, packing, transport and so on are all operational matters).
A strategic plan should not be confused with a business plan. The former is likely to be a (very) short document whereas a business plan is usually a much more substantial and detailed document. A strategic plan can provide the foundation and frame work for a business plan. For more information about business plans, refer to Writing a Business Plan, Insights into Business Planning and Free-Plan: Business Plan Guide & Template.
A satisfactory strategic plan must be realistic and attainable so as to allow managers and entrepreneurs to think strategically and act operationally - see Developing a Strategic Business Plan and Devising Business Strategies for further insights. Use the Online Strategic Planner to create your own 2-3 page strategic plan.
Before you put "pen to paper", decide the type of business plan you need:
Based on a survey of over 400 business plan writers, the following table characterizes "typical" plans written for different purposes:
For detailed guidance on compiling a plan, review the white paper on Writing a Business Plan, Free-Plan (free 150-page Business Plan Guide and Word-based Template) and the Checklist for Preparing a Business Plan.
Before any detailed work commences on writing a comprehensive business plan, you should:
Shortcomings in the concept and gaps in supporting evidence and proposals need to be clearly identified. This will facilitate an assessment of research to be undertaken before any drafting commences. Bear in mind that a business plan should be the end result of a careful and extensive research and development project which must be completed before any serious writing of a plan should be started. Under no circumstances should you start writing a plan before all the key issues have been crystallized and addressed.
For more tips and suggestions, check the white paper on Writing a Business Plan and Free-Plan our free 150-page Business Plan Guide and Template (Word format). Also, refer to the 30-point Checklist for Preparing a Business Plan.
Looking for New Business Ideas
When looking around for business ideas, bear in mind that these could be based on any of the following approaches:
You should narrow your search to specific market or product areas as quickly as possible. For example, the "food business" is too broad a search area. Do you mean manufacturing, distribution or retailing, or do you mean fresh, frozen, pre-prepared etc. or do you mean beverages, sauces, confectionery etc.? It is better to pursue several specific ideas (hypotheses) rather than one diffuse concept which lacks specifics and proves impossible to research and evaluate. Generally, you should always aim for quality rather than cheapness. Be very cautious about pursuing ideas which involve any prospect of price wars or are very price sensitive; of getting sucked into short-lived fads; or of having to compete head-to-head with large, entrenched businesses.
To locate ideas, observe consumer behavior:
Also, look at changing existing products or services with a view to:
For further suggestions and tips, see the white paper on Getting New Business Ideas.
Difference between Profit and Cash FlowWhen planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival. Bear in mind that more businesses fail for lack of cash flow than for want of profit.
Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. For further information on the cash cycle and working capital, click here.
The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.
The following simplified example illustrates the timing differences between profits and cash flows:
This shows that the cash associated with the reported profit for Month 1 will not fully materialize until Month 3 and that a serious cash short- fall will be experienced during Month 1 when receipts from sales will total only $20,000 as compared with cash payments to suppliers of $40,000.
Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.
Lessons about business planning derived from an extensive survey conducted by PlanWare include the following:
For more detailed guidance on preparing a plan, check the white paper on How to Write a Business Plan and Free-Plan our free 150-page Business Plan Guide and Template (Word format). Also, refer to the 30-point Checklist for Preparing a Business Plan.
Here are some suggestions to follow if you want to write a truly dreadful business plan, or to avoid if you wish to write a good plan:
More seriously, if you reverse each Do and Don't, you'll have a useful guide for preparing a sound business plan. You can get this list in a printable checklist format at Checklist for Better Business Plans. For further help, see Insights into Business Planning, Business Plan Guide and the white paper on How to Write a Business Plan.
When planning a new business or developing an existing one, it is useful to have a gut feel for the characteristics of a successful business. Here are some criteria against which to measure your business or its plan:
Behind every characteristic there should be an explicit strategy designed to increase the chances of success and not simply aimed at reducing the likelihood of failure. For more help on setting strategies, see Developing a Strategic Business Plan, Devising Business Strategies and the free Online Strategic Planner for creating a 3-page strategic plan.
Once your business plan has been drafted, you should turn your attention to its presentation. First impressions can be very important and it is essential that your plan makes a good initial impact. Here are some suggestions:
Cash flow is the life blood of every business and lack of cash is a much more significant cause of business failure than trading losses. The management and preservation of cash is a priority task which must be performed day in and day out in every business. This task is so routine that its importance is often overlooked. Here are some ways to improve cash flow:
For a list of over 30 ways of improving cash flow, visit the Checklist for Improving Cash Flow. Central to any program to improve cash flow is an accounting system to handle inventory, invoicing, receivables and payables. Allied to this is the need for frequently-updated cash flow projections to provide early warnings of possible liquidity problems and a foundation for improvement plans. For more on this, see the paper on Making Cash Flow Forecasts and download and try the Cashflow Plan software tools for making rolling 12-month forecasts and creating cashflow improvement plans.
Once you have completed the main parts of your business plan, insert a section entitled "Conclusion" and use it to wrap up your plan and to leave the reader with a warm and positive view of your business and its plans. Briefly, review what the business does and expects to achieve. Indicate why it will succeed and why it should be supported by investors etc. Be very positive and confident to encourage favorable reactions and draw on some of the strengths and opportunities identified in earlier parts of the plan dealing dealing with Mission, SWOTs, Strategies etc.
Confine your Conclusion to a few carefully-drafted paragraphs and write it once the plan is almost complete. At this stage, get someone to read a near-final draft plan to check that it makes good business sense, reads well and is clearly presented. Ideally, that "someone" should be a detached, independent person involved in business with experience of your industry and/or business planning. Hopefully, they will be able to see "the wood from the trees" better than you can. Don't be resentful of any criticism - use it to improve the next draft. If your plan is lengthy or important, anticipate several drafts.
Key questions you should be asking yourself at this wrap up stage include:
The financial section of a business plan should be based on monthly projections for the first year covered by the plan plus quarterly (or annual) projections for the next two years. In the case of a complex or seasonal business, monthly projections may be required for 2+ years with less detailed projections for subsequent years. The projections for each forecasting interval should comprise fully-integrated income statements, cash flows, balance sheets and key ratios.
Financial projections must not be prepared in isolation from the rest of the plan. For example, the results of market research should flow into your sales projections which, in turn, should drive the revenue forecasts. Under no circumstances should you do the detailed financial projections and then write a plan to suit. By all means, do some high-level financial planning at an early stage to get a feel for the basic figures and sensitivities but don't let the plan become a financially-driven document without any strong market basis. For further tips and traps, refer to the white paper on Preparing Financial Projections.
Keep this financial section within four-eight pages by ensuring that only high-level projections are presented in summary tables and use simple charts to show trends. Do not include any detailed spreadsheet tables as no one will bother to read them! Instead, place them in an appendix at the back of the plan (or even withhold them for the plan and only make them available on request).
For simplicity and clarity, the key topics in the financial section could be presented in a series of short sub-sections (from half- to a full-page long) covering key assumptions, projected income statements, cash flow forecasts, projected balance sheets, ratio analyses and sensitivity analyses.
Our fully-integrated financial planner - Exl-Plan - offers comprehensive facilities for generating financial projections for a business plan as well doing sensitivity and ratio analyses. It also generates summary reports which are idea for use in the body of a business plan. For more help, check the Business Plan Guide to see how the section on Financial Projections fits into the overall business plan.
When planning a business, be clear and assertive about the strategies to be followed. Don't fudge or say "On the one hand ...... and on the other hand .....". If sound groundwork has been done on the background issues relating to the business, market and SWOTS etc., many key strategies will suggest themselves. You can weave these together into explicit strategic statement(s) of intent. For example:
Our aim is not to encourage planning by words but to illustrate the types of issues that might be considered when formulating explicit strategies. These can be applied equally to start-ups and established businesses. Of course, the big distinction is that the start-up is building strategies from scratch without the benefits of any market position, momentum or pre-existing strategies.
Any selected suite of strategies must be integrated and internally consistent, and in-line with the business's broader vision, mission and objectives (see Developing a Strategic Business Plan). There is little point in a business claiming to be technologically advanced if its R&D spend is sub-critical, or aspiring to become a leading brand if it has neither products, nor funds nor distribution to ensure this could happen.
Strategic statements can be defined as broad indicators of the direction(s) in which a business should be driven in order to fulfil its vision/mission while taking realistic account of its resources, constraints and opportunities. They also serve as the link between the a business's objective and actions plans and should result in a series of integrated sub-strategies and action programs with goals, budgets, timetables. The latter can be most effective when linked to specific functional areas within the business e.g. sales, marketing, operations and so on. Limit the number of sub-strategic (tactical) programs to what can be realistically achieved within a realistic time frame and, if necessary, prioritize them. It is possible that just one strategy is needed for each of the business's main main functional areas.
Having made great progress with writing your business plan and crunching the financials, you may identify a significant funding need that cannot be bridged from your own resources (and those of your relatives, friends, colleagues, credit cards, local bank manager and so on) or from the business's cash flow. Consequently, you will need to raise external finance in the form of equity or loans or an equity/loan combination. When writing your plan, devote a short main section (immediately after the financial section) to present your needs and proposals. Here are some suggestions:
Of course, you may wish to withhold specific funding terms until you have met possible investors or lenders face-to-face and heard their initial reactions. In this case, this section would be confined to a description of funding needs and possible uses, sources and forms.
Our fully-integrated financial planner - Exl-Plan - offers comprehensive facilities for generating financial projections for a business plan as well doing sensitivity analysis and exploring "what-ifs" and alternative funding scenarios. Check the Business Plan Guide to see how the section on Funding Requirements and Proposals fits into the overall business plan.
PlanWare offers an interesting range of free business planning software which can be useful to cash-strapped entrepreneurs wishing to launch businesses on a shoe-string and to students doing B School or college projects, or participating in business plan competitions. The following items are likely to be most useful:
Get more details of PlanWare's free stuff here.
Here are some suggested resolutions for better business planning applicable to any established business:
When preparing a business plan (or a marketing & sales plan), two critical sections stand out - Profiles of Target Markets and Marketing Strategies, Sales Plans & Projections. The latter should build on the market assessment (see tip on Sound market analysis is key to a sound Business Plan). In simple terms, marketing and sales plans should cover the 4Ps - Product, Price, Place and Promotion. The following issues need to be considered:
Based on these marketing strategies and plans, you can compile detailed sales (volumes and prices) projections for your various segments and products/services. These projections should be monthly (for at least one year ahead especially if the business is seasonal) and either quarterly (much better) or annual thereafter.
Cash is a business's life blood and every manager's primary task is to help keep it flowing and to use this cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. The faster a business expands, the more cash it will need for working capital and investment.
The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.
Cash flow can be significantly enhanced if the receivables are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.
Management of payables is just as important as the management of receivables. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!).
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.
When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cashflow forecasts. Our financial planning software packages - Exl-Plan and Cashflow Plan - can facilitate this task as they provide for the setting of targets for receivables, payables and inventory. See also the Checklist for Improving Cashflow.
Business failure is a distinct possibility for many businesses, especially for start-ups during the so-called three-year "valley of death". A key to getting through these years is to avoid the obvious mistakes. Generally speaking, businesses fail for significant and substantial reasons which are often very evident to outsiders. Insiders often fail to see them because of their closeness, determination and so on. Areas where failure is most likely to occur include finance. markets/sales, offerings, management and operations. See a detailed listing of possible reasons for business failure.
Clearly, there are very many reasons as to why businesses fail. The key point is that causes are usually very apparent (especially with hindsight) and the trick is to anticipate them by executing appropriate tactics and strategies from the outset. Three examples:
Given that reasons for failure are often both simple and clear, it should (in theory) be possible to reduce the possibility of failure through prior experience, forethought and effective planning.
For more information, see Devising Business Strategies, Developing a Strategic Business Plan and Writing a Business Plan. Also look at and/or participate in the online poll on Strengths & Weaknesses of Businesses.
How long should it take to write a business plan and how should the time be allocated?
Some useful answers to these questions can be gleamed from an ongoing survey being conducted by PlanWare amongst people who have prepared written business plans.
Based on over two thousand responses, more than one-third (38%) of the respondents spent less than a month on their plan; a similar proportion (37%) worked on their plan for 2-3 months; and the balance (25%) spent several months on the task. More detailed analysis of these findings indicated that:
The survey also showed that the task of actually writing the plan was usually the least time consuming part of the planning process as almost two-thirds (63%) of respondents spend more time researching than writing their plan. For a fifth (21%) of respondents researching and writing times were about equal. Only a small minority (16%) undertook little or no research before drafting their plan.
Cash is the lifeblood of every business and more businesses fail for want of cash than lack of profit. These may be cliches but they are very, very true.
A key element of controlling cash is to forecast cash flows and requirements. This entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.
Typically, a spreadsheet-based plan can be used to compile cashflow forecasts, assess possible funding requirements and explore the likely financial consequences of alternative strategies. Used effectively, this plan can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow or provide a basis for negotiating short-term funding from a bank.
When planning to seek external funding, the time horizon covered by the forecasts should be equal to or greater than the period for which the funding is needed. The greater the amount of funding required and the longer the period of exposure for the provider of these funds, the more comprehensive must be the supporting projections and plan.
For short-term cash planning you should make assumptions on sales, costs, credit, funding etc. to produce monthly cash flow projections for up to a year ahead. Initial assumptions can be readily altered to evaluate alternative scenarios. For example, the plan could be used to explore the extent to which future sales could be increased whilst holding bank borrowings within predetermined limits; to assess the effects on cash flow of varying sales, costs or credit terms; or to determine the likely short-term funding requirements for a business.
Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.
The Market Analysis section of a business plan is very difficult to prepare especially for start-ups or established businesses diversifying in new (to them) markets. These difficulties will be compounded, due to an absence of any reliable data or evidence of likely demand, for businesses entering completely new markets or launching radically new offerings. Nonetheless, this section is critical as it underpins the business plan and demonstrates that the promoters have done their homework and know their marketplaces (at least as well as the incumbent players or other new entrants). If this section is unclear, vague or superficial, it begs the question as to whether there might be any real, sustainable demand for the proposed offerings.
Use this section to profile target markets based on market sizes, segments, trends, competition and user/customer profiles. Allow about three-six pages for this most important part of your plan. In most cases, it is very desirable that all detailed market research (field and/or desk) and analysis be completed before this section is written. If research reports or detailed findings are available, refer to their detailed findings in appendices or include them as annexes to the plan.
You will need to analyze the market in fair detail to drill down to your actual target market segments which you can then explore in depth. You will also need to consider competition, customer/user categories and so on. Create simple tables to show how market sizes, segments and shares are likely to move in the future after your entry/growth.
Avoid at all costs generalized statements like "we aim to achieve xx% of the xx market within three years". Instead, build up your projections from sound analysis/research and detailed assumptions (number of outlets, customers, consumption and so on) based on clear marketing and sales plans.
Before starting to write a business plan, you must have established a clear vision and direction for the business. Without these, your detailed plan will lack focus and it will roam around in whatever direction your latest idea or your keyboard (or pen) takes you. Instead, you need to start with some serious strategic thinking about a vision and mission.
First, you need to develop a realistic Vision for the business. This should be presented as a pen picture of the business in three or more years time in terms of its likely physical appearance, size, activities etc. Answer the question: "if someone from Mars visited the business, what would they see (or sense)?" Consider its future products, markets, customers, processes, location, staffing etc. Here is a fictitious vision:
Next up is a Mission statement. This indicates the purposes of the business, for example, "to design, develop, manufacture and market specific product lines for sale on the basis of certain features to meet the identified needs of specified customer groups via certain distribution channels in particular geographic areas". A statement along these lines indicates what the business is about and is infinitely clearer than saying, for instance, "we're in electronics" or worse still, "we are in business to make money" (assuming that the business is not a mint !). Here is a fictitious mission statement:
Twelve things to do when writing your business plan:
When preparing financial projections for your business plan, be conscious of the pitfalls and dangers listed below. These can arise as the result of a lack of foresight or insight, or because of excessive optimism. As they can lead to underestimation of the resources required to develop a business with potentially disastrous consequences, it can be counterproductive to overstate its potential.
Realistic views should always be taken of a business's prospects, prospective profits, funding requirements etc. There is often merit in compiling "worst" case projections to complement "most likely" or "best" forecasts. In practice, the realization of financial projections, especially for a new business without any trading history, might easily take twice as long and cost twice as much as expected. This is the double (costs), double (time) or half (revenues) rule. Remember that it is much less painful to deal with a flaw in a business at the planning stage, than later on when commitments have been made and the business has started trading.
A SWOT analysis is an assessment of the Strengths, Weaknesses, Opportunities and Threats facing a new or established business. It should always be conducted prior to the compilation of a detailed business plan. A realistic and unbiased SWOT analysis could form the basis for the strategies to be followed throughout the plan. A failure to determine SWOTs could result in a plan which is unclear, misguided and lacking focus and direction.
Strengths and weaknesses are essentially internal to the organization and relate to matters concerning resources, programs and organization in key areas.The objective is to build up a picture of the outstanding good and bad points, achievements and failures and other critical features within the company. If a startup is being planned, the strengths and weaknesses are related mainly to the promoter(s) - their experience, expertise and management abilities - rather than to the project.
The threats and opportunities are external to the company and relate to the industry and marketplace in which the business operates; changes or trends in competition, technologies and so on.
Once the SWOT review is complete, the future strategy may be readily apparent or, as is more likely the case, a series of strategies or combinations of tactics will suggest themselves. Use the SWOTs to help identify possible strategies as follows:
If the business is seeking significant growth, it is important to fast-forward and assess SWOTs as they might exist a year or two hence. This will help ensure that strategies are ambitious and robust and that emerging issues are anticipated. Have a look at the discussion on SWOTs and related matters in Developing a Strategic Business Plan (and especially Sections 1.3 to 1.5).
The resulting strategies can then be filtered and moulded to form the basis of a realistic strategic plan - see Devising Business Strategies for further insights into the development of strategies and the free Online Strategic Planner for creating a 3-page strategic plan. Here is a sample strategic plan compiled using the planner. A plan along these lines should be incorporated into a business plan and it would, in effect, become the foundation for all the assessments, actions, projects and programs detailed throughout the plan.
Here's the summary of a planning tip contributed by Intuitive Life: A Business Weblog by Dave Taylor:
What is the ideal page length of a business plan? Well, what is the length of a piece of string? The answer really depends on the purpose and scope of the plan - are we talking about a basic or comprehensive plan. See the tip below on Decide on your type of Business Plan at the Outset.
Analysis of findings from an ongoing survey about business plans by PlanWare indicates that the main parts (i.e. the body of plan excluding appendices etc.) of many basic plans are under ten pages long whereas comprehensive plans are often 10-25 pages long. More specifically, the analysis found that almost half of all comprehensive plans were at least 26 pages long as compared with just one-tenth of basic plans (see Fig 3 below).
When budgeting your plan's length, go for the shortest possible plan consistent with your business's scale, objective of the plan etc. - aim for quality rather than quantity! Bear in mind that the overall length of the plan is likely to increase as writing progresses. If your plan gets too long, do some ruthless editing and redrafting. If it is any consolation, it should be much easier to shorten a long plan than to lengthen a short one!
Based on the suggested section lengths in our Business Plan Guide, the length of a comprehensive plan could range between 27 to 47 pages (excluding cover, contents list and appendices). This works out at a minimum of about two pages for each main section within the plan. Obviously, this length should be scaled back to about ten pages or so for a new or established business (of almost any size) preparing a basic plan by excluding sections and scaling back the length of remaining sections.
Here are some quotations to motivate and inspire the planning and development of your business:
For more quotations, see this list.
Having built up a moderate list of new business ideas, these must be evaluated so that a short-list of preferred options with the greatest potential and lowest risk can be assessed in greater depth.
One way of evaluating ideas would be to use a simple scoring system using gut-feel with a limited number of criteria such as personal fit, degree of risk, funding need and so on - see a comprehensive list of factors at Getting New Business Ideas.
Before scoring individual ideas, run through the criteria and set what you feel should be minimum desirable scores for each. The resultant total could be used as your overall minimum threshold. If some ideas don't achieve satisfactory scores, drop them and look for better ones.
Once your short-list has been developed, you will need to start devoting substantial time to assessment, research, development and planning. For a start, you could pursue the following tasks:
For more insights into these tasks, see Getting New Business Ideas.
Bear in mind that the incubation period for a new business can easily last several months or even years. Don't rush into the first feasible idea without letting it incubate or develop in your mind for a reasonable period. There might be a tendency to get all fired up and enthusiastic such that your heart is starting to rule your head. Instead, stand back and think!! Do not be afraid to seek external assistance from professional advisers or from enterprise support organizations which are virtually everywhere. These include SBDCs in the US, Enterprise Agencies & Business Links in the UK, County Enterprise Boards in Ireland, EC BICs throughout the EU and so on...... For help with converting your preferred business idea into a business plan, see Getting New Business Ideas and How to Write a Business Plan.