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5.6 The Business Plan
- Discuss the importance of planning for your business, and identify the key sections of a business plan.
If you want to start a business, you must prepare a business plan. This essential document should tell the story of your business concept, provide an overview of the industry in which you will operate, describe the goods or services you will provide, identify your customers and proposed marketing activities, explain the qualifications of your management team, and state your projected income and borrowing needs.
Purpose of a Business Plan
The business plan is a plan or blueprint for the company, and it’s an indispensable tool in attracting investors, obtaining loans, or both. Remember, too, that the value of your business plan isn’t limited to the planning stages of your business and the process of finding start-up money. Once you’ve acquired start-up capital, don’t just stuff your plan in a drawer. Treat it as an ongoing guide to your business and its operations, as well as a yardstick by which you can measure your performance. Keep it handy, update it periodically, and use it to assess your progress.
In developing and writing your business plan, you must make strategic decisions in the areas of management, operations, marketing, accounting, and finance—in short, in all the functional areas of business that we described in Chapter 1 "The Foundations of Business". Granted, preparing a business plan takes a lot of time and work, but it’s well worth the effort. A business plan forces you to think critically about your proposed business and reduces your risk of failure. It forces you to analyze your business concept and the industry in which you’ll be operating, and it helps you determine how you can grab a percentage of sales in that industry.
The most common use of a business plan is persuading investors, lenders, or both, to provide financing. These two groups look for different things. Investors are particularly interested in the quality of your business concept and the ability of management to make your venture successful. Bankers and other lenders are primarily concerned with your company’s ability to generate cash to repay loans. To persuade investors and lenders to support your business, you need a professional, well-written business plan that paints a clear picture of your proposed business.
Sections of the Business Plan
Though formats can vary, a business plan generally includes the following sections: executive summary, description of proposed business, industry analysis, mission statement and core values, management plan, goods or services and (if applicable) production processes, marketing, global issues, and financial plan. Let’s explore each of these sections in more detail. (Note: More detailed documents and an Excel template are available for those classes in which the optional business plan project is assigned.)
The executive summaryOverview emphasizing the key points of a business plan to get the reader excited about the business’s prospects. is a one- to three-page overview of the business plan. It’s actually the most important part of the business plan: it’s what the reader looks at first, and if it doesn’t capture the reader’s attention, it might be the only thing that he or she looks at. It should therefore emphasize the key points of the plan and get the reader excited about the prospects of the business.
Even though the executive summary is the first thing read, it’s written after the other sections of the plan are completed. An effective approach in writing the executive summary is to paraphrase key sentences from each section of the business plan. This process will ensure that the key information of each section is included in the executive summary.
Description of Proposed Business
Here, you present a brief description of the company and tell the reader why you’re starting your business, what benefits it provides, and why it will be successful. Some of the questions to answer in this section include the following:
- What will your proposed company do? Will it be a manufacturer, a retailer, or a service provider?
- What goods or services will it provide?
- Why are your goods or services unique?
- Who will be your main customers?
- How will your goods or services be sold?
- Where will your business be located?
Because later parts of the plan will provide more detailed discussions of many of these issues, this section should provide only an overview of these topics.
This section provides a brief introduction to the industry in which you propose to operate. It describes both the current situation and the future possibilities, and it addresses such questions as the following:
- How large is the industry? What are total sales for the industry, in volume and dollars?
- Is the industry mature or are new companies successfully entering it?
- What opportunities exist in the industry? What threats exist?
- What factors will influence future expansion or contraction of the industry?
- What is the overall outlook for the industry?
- Who are your major competitors in the industry?
- How does your product differ from those of your competitors?
Mission Statement and Core Values
This portion of the business plan states the company’s mission statement and core values. The mission statementStatement describing an organization’s purpose or mission—its reason for existence—and telling stakeholders what the organization is committed to doing. describes the purpose or mission of your organization—its reason for existence. It tells the reader what the organization is committed to doing. For example, one mission statement reads, “The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”Southwest Airline’s company Web site, about SWA section, http://www.southwest.com/about_swa/mission.html (accessed October 30, 2008).
Core valuesStatement of fundamental beliefs describing what’s appropriate and important in conducting organizational activities and providing a guide for the behavior of organization members. are fundamental beliefs about what’s important and what is (and isn’t) appropriate in conducting company activities. Core values are not about profits, but rather about ideals. They should help guide the behavior of individuals in the organization. Coca-Cola, for example, intends that its core values—honesty, integrity, diversity, quality, respect, responsibility, and accountability—will let employees know what behaviors are (and aren’t) acceptable.
Management makes the key decisions for the business, such as its legal form and organizational structure. This section of the business plan should outline these decisions and provide information about the qualifications of the key management personnel.
A. Legal Form of Organization
This section dentifies the chosen legal form of business ownership: sole proprietorship (personal ownership), partnership (ownership shared with one or more partners), or corporation (ownership through shares of stock).
B. Qualifications of Management Team and Compensation Package
It isn’t enough merely to have a good business idea: you need a talented management team that can turn your concept into a profitable venture. This part of the management plan section provides information about the qualifications of each member of the management team. Its purpose is to convince the reader that the company will be run by experienced, well-qualified managers. It describes each individual’s education, experience, and expertise, as well as each person’s responsibilities. It also indicates the estimated annual salary to be paid to each member of the management team.
C. Organizational Structure
This section of the management plan describes the relationships among individuals within the company, listing the major responsibilities of each member of the management team.
Goods, Services, and the Production Process
To succeed in attracting investors and lenders, you must be able to describe your goods or services clearly (and enthusiastically). Here, you describe all the goods and services that you will provide the marketplace. This section explains why your proposed offerings are better than those of competitors and indicates what market needs will be met by your goods or services. In other words, it addresses a key question: What competitive advantage will the company’s goods and services have over similar products on the market?
This section also indicates how you plan to obtain or make your products. Naturally, the write-up will vary, depending on whether you’re proposing a service company, a retailer, or a manufacturer. If it’s a service company, describe the process by which you’ll deliver your services. If it’s a retail company, tell the reader where you’ll purchase products for resale.
If you’re going to be a manufacturer, you must furnish information on product design, development, and production processes. You must address questions such as the following:
- How will products be designed?
- What technology will be needed to design and manufacture products?
- Will the company run its own production facilities, or will its products be manufactured by someone else?
- Where will production facilities be located?
- What type of equipment will be used?
- What are the design and layout of the facilities?
- How many workers will be employed in the production process?
- How many units will be produced?
- How will the company ensure that products are of high quality?
This critical section focuses on four marketing-related areas—target market, pricing, distribution, and promotion:
- Target market. Describe future customers and profile them according to age, gender, income, interests, and so forth. If your company will sell to other companies, describe your typical business customer.
- Pricing. State the proposed price for each product. Compare your pricing strategy to that of competitors.
- Distribution. Explain how your goods or services will be distributed to customers. Indicate whether they’ll be sold directly to customers or through retail outlets.
- Promotion. Explain your promotion strategy, indicating what types of advertising you’ll be using.
In addition, if you intend to use the Internet to promote or sell your products, also provide answers to these questions:
- Will your company have a Web site? Who will visit the site?
- What will the site look like? What information will it supply?
- Will you sell products over the Internet?
- How will you attract customers to your site and entice them to buy from your company?
In this section, indicate whether you’ll be involved in international markets, by either buying or selling in other countries. If you’re going to operate across borders, identify the challenges that you’ll face in your global environment and explain how you’ll meet them. If you don’t plan initially to be involved in international markets, state what strategies, if any, you’ll use to move into international markets when the time comes.
In preparing the financial section of your business plan, specify the company’s cash needs and explain how you’ll be able to repay debt. This information is vital in obtaining financing. It reports the amount of cash needed by the company for start-up and initial operations and provides an overview of proposed funding sources. It presents financial projections, including expected sales, costs, and profits (or losses). It refers to a set of financial statements included in an appendix to the business plan.
Here, you furnish supplemental information that may be of interest to the reader. In addition to a set of financial statements, for example, you might attach the résumés of your management team.
- A business plan tells the story of your business concept, provides an overview of the industry in which you will operate, describes the goods or services you will provide, identifies your customers and proposed marketing activities, explains the qualifications of your management team, and states your projected income and borrowing needs.
- In your business plan, you make strategic decisions in the areas of management, operations, marketing, accounting, and finance. Developing your business plan forces you to analyze your business concept and the industry in which you’ll be operating. Its most common use is persuading investors and lenders to provide financing.
A business plan generally includes the following sections:
- Executive summary. One- to three-page overview.
- Description of proposed business. Brief description of the company that answers such questions as what your proposed company will do, what goods or services it will provide, and who its main customers will be.
- Industry analysis. Short introduction to the industry in which you propose to operate.
- Mission statement and core values. Declaration of your mission statement, which are fundamental beliefs about what’s important and what is (and isn’t) appropriate in conducting company activities.
- Management plan. Information about management team qualifications and responsibilities, and designation of your proposed legal form of organization.
- Goods, services, and the production process. Description of the goods and services that you’ll provide in the marketplace; explanation of how you plan to obtain or make your products or of the process by which you’ll deliver your services.
- Marketing. Description of your plans in four marketing-related areas: target market, pricing, distribution, and promotion.
- Global issues. Description of your involvement, if any, in international markets.
- Financial plan. Report on the cash you’ll need for start-up and initial operations, proposed funding sources, and means of repaying your debt.
- Appendices. Supplemental information that may be of interest to the reader.
Let’s start with three givens: (1) college students love chocolate chip cookies, (2) you have a special talent for baking cookies, and (3) you’re always broke. Given these three conditions, you’ve come up with the idea of starting an on-campus business—selling chocolate chip cookies to fellow students. As a business major, you want to do things right by preparing a business plan. First, you identified a number of specifics about your proposed business. Now, you need to put these various pieces of information into the relevant section of your business plan. Using the business plan format described in this chapter, indicate the section of the business plan into which you’d put each of the following:
- You’ll bake the cookies in the kitchen of a friend’s apartment.
- You’ll charge $1 each or $10 a dozen.
- Your purpose is to make the best cookies on campus and deliver them fresh. You value integrity, consideration of others, and quality.
- Each cookie will have ten chocolate chips and will be superior to those sold in nearby bakeries and other stores.
- You expect sales of $6,000 for the first year.
- Chocolate chip cookies are irresistible to college students. There’s a lot of competition from local bakeries, but your cookies will be superior and popular with college students. You’ll make them close to campus using only fresh ingredients and sell them for $1 each. Your management team is excellent. You expect first-year sales of $6,000 and net income of $1,500. You estimate start-up costs at $600.
- You’ll place ads for your product in the college newspaper.
- You’ll hire a vice president at a salary of $100 a week.
- You can ship cookies anywhere in the United States and in Canada.
- You need $600 in cash to start the business.
- There are six bakeries within walking distance of the college.
- You’ll bake nothing but cookies and sell them to college students. You’ll make them in an apartment near campus and deliver them fresh.