So, you have an awesome idea for a business.
You know exactly what products and services you want to provide consumers in your target markets. Moreover, you are confident and ready to be your own boss. What next? Well, whether you’re planning to open a donut shop, beauty supply store, or serve the best homemade ice cream sundae in your new pink colored store front, you will need to clarify and explain why your business is needed and how it is different from your competitors. Here are 9 critical elements of a business plan every aspiring entrepreneur should understand in 2022.
Why is a Business Plan important?
A business plan is important because it paints a picture to potential partners, investors (most importantly lenders) of your company’s structure and goals. Furthermore, it serves as a roadmap guiding the launch and growth of your new business. If you are looking to open up shop, you’ll need a business plan! You should include the following 9 critical elements in your plan.
1. The Executive Summary
This section is the most important part of your plan. Because often, it’s the only part that a prospective lender or investor reads before making a decision whether or not to move forward in reading the rest of your plan. It should fully convey your enthusiasm for your business ideas and get readers as excited about your company as you are.
Your Executive Summary should appear first in your business plan.
It should summarize what you expect your business to accomplish. Since it’s meant to highlight what you intend to discuss in the rest of the plan, many of my mentors have suggested to come back and write this section last. The U.S. Small Business Administration suggests the same.
Writing your Executive Summary Last
After you have completed the rest of the business plan allows you to think through all the elements of your startup and prepares you to properly summarize them in this section. The Executive Summary should briefly explain each of the below:
- An overview of your business idea (one or two sentences): What is your business niche?
- A description of your product and/or service: What problems are you solving for your target customers?
- Goals for the business: Where do you expect the business to be in one year, three years, five years?
- Proposed target markets: Who are your ideal customers?
- Competition and what differentiates your business from others in your space: Who are you up against and what unique selling proposition will help you succeed?
- Your management team and their prior experience: What do they bring to the table that will give your business a competitive edge?
- Financial outlook for the business: If you’re using the business plan for financing purposes, explain exactly how much money you want, how you will use it, and how that will make your business more profitable.
You should limit your Executive Summary to one or two pages at the most.
After reading the Executive Summary, the reader should have a basic understanding of your business. They should be excited about its potential and should be interested enough to read further.
2. Company Description
The second section in your business plan is your company’s description. This section outlines the basic elements of your business such as your mission statement, philosophies and vision, company goals, target markets, industry and legal structure.
Your mission statement is a brief explanation of your company’s reason for existing. The mission statement can be as short as a marketing tag line or more descriptive. In general, it is suggested to keep your mission statement to a minimum of a couple of sentences.
- Philosophies and vision should answer the following question, “What VALUES does your business live by?” Is it honesty, integrity, community or innovation? These are all values that may be important to your business philosophy. Vision has to do with the long-term outlook of your business. What do you ultimately want it to become? For instance, become a national chain, franchise or merge with a larger organization.
- Company goals specify your long-term and short-term goals as well as any milestones and benchmarks you’ll use to measure your company’s progress. For example, if one of your goals is to open a second location, your milestones might include reaching a specific sales volume or signing contracts with a certain number of clients in a new market.
- Target market is a brief explanation of who your target customers are. You will clarify this further in your marketing plan section.
- Legal structure: In this section you will clarify how your company is organized. Is your business a sole proprietorship, LLC, partnership, or corporation? Why did you choose this particular form of business? Is there more than one owner? Explain how the ownership of the company is divided. If you have investors, explain the percentage of shares they own. This information is important to investors and lenders.
Your company description should also discuss how your business will stand out from others in the industry and how the products and services you are providing will be helpful to your target audience. After reading the company description, the reader should have a basic understanding of your business’s mission, vision, goals, target market, competitive landscape and legal structure.
3. What Are Your Products & Services?
In this section you will explain and describe your products and services expanding on what was described in the executive summary and your company description.
The individuals reading this portion of your business plan should know exactly what you’re planning to create and sell, how long your products are supposed to last, and how they’ll meet an existing need.
Moreover, every business needs to solve a problem that its customers face. It’s important to explain what the problem is and how your products and services will solve consumer problems. What are its benefits, features and unique selling proposition?
Your company won’t be the only solution (every business has competitors), but you need to explain why your solution is better than the others, targets a customer base your competitors are ignoring, or has some other characteristic that gives your business a competitive edge.
It’s a good idea to mention your suppliers.
So, if you know how much it’ll cost to make your products and how much money you’re hoping to bring in, those are great details to add in this section. Further, you’ll need to list anything related to patents and copyright concerns.
After reading the Products & Services section, the reader should have a clear understanding of what your business does, what problem it solves for customers, and the unique selling proposition that makes it competitive.
4. Marketing Plan
This section provides details on your industry, the competitive landscape, your target market, and how you will market your business to consumers. There are two kinds of market research: primary and secondary.
Primary Market Research
Primary market research is information you gather yourself. This could include going online or driving around town to identify competitors, interviewing or surveying people who fit the profile of your target customers, or doing traffic counts at a retail location you’re considering.
Secondary Market Research
Secondary market research is information from sources such as trade organizations and journals, magazines and newspapers, census data and demographic profiles. You can find this information online, at libraries, from chambers of commerce, from vendors who sell to your industry, or from government agencies.
Discuss what barriers to entry your startup faces and how you plan to overcome them. Once your business surmounts the barriers to entry you mentioned in this section, what additional threats might it face? It’s smart to include a S.W.O.T analysis.
Describe all your products or services, being sure to focus on the customer’s point of view. Describe your target customer. You may have more than one target customer group. For instance, if you sell a product to consumers through distributors, such as retailers, you have at least two kinds of target customers: the distributors (businesses) and the end users (consumers).
Identify your target customer groups.
Create a demographic profile for each group. One of the biggest mistakes you can make in a business plan is to claim you have no competition. Every business has competitors. Your plan must show that you’ve identified yours and understand how to differentiate your business.
You explained pricing briefly in the products and services section; now it’s time to go into more detail. How do you plan to set prices? Keep in mind that few small businesses can compete on price without hurting their profit margins. Instead of offering the lowest price, it’s better to go with an average price and compete on quality and service.
After reading the Marketing Plan section, the reader should understand who your target customers are, how you plan to market to them, what sales and distribution channels you will use, and how you will position your product/service relative to the competition.
5. Operational Plan
This section explains the daily operation of your business, including its location, equipment, personnel and processes. How will you produce your product or deliver your services? Describe your production methods, the equipment you’ll use, and how much it will cost to produce what you sell.
How will you maintain consistency?
Describe the quality control procedures you’ll use. Where is your business located? You briefly touched on this in the company overview. In this section, expand on that information with details. What type of legal environment will your business operate in? How are you prepared to handle legal requirements?
After reading the Operational Plan section, the reader should understand how your business will operate on a day-to-day basis.
6. Management & Organization
This section should give readers an understanding of the people behind your business, their roles and responsibilities, and their prior experience. If you’re using your business plan to get financing, know that investors and lenders carefully assess whether you have a qualified management team.
Include brief biographies of the owner/s and key employees. Include resumes in the Appendix. Here, summarize your experience and those of your key employees in a few paragraphs per person. Focus on the prior experience and skills that have prepared your team to succeed in this business. If anyone has previous experience starting and growing a business, explain this in detail.
Explain how you plan to fill in any gaps in management and/or experience. For instance, if you lack financial know-how, will you hire a CFO or retain an accountant? If you don’t have sales skills, will you hire an in-house sales manager or use outside sales reps?
Develop and include an organizational chart. This should include both roles you’ve already filled and roles you plan to fill in the future. After reading the Management & Organization section, the reader should feel confident that you have a qualified team leading your business.
7. Startup Expenses & Capitalization
In this section, detail the expenses involved in opening your company for business and how much capital you’ll need. Estimating startup expenses as accurately as possible helps you gather enough startup money.
In the body of this section, be sure to explain all the assumptions behind the figures. How did you come up with these expenses? If you’ve secured or expect to secure loans, explain the source/s, amount/s and terms. If you’ve secured or expect to secure investors, explain how much each investor will contribute and what percentage of ownership each receives in return.
Be sure to include extra capital for unexpected expenses. Opening a new business almost always ends up costing more than expected, and you need to be prepared. How much should you set aside for contingencies? You can talk to other business owners in your industry to get a ballpark figure. If you can’t come up with a figure this way, a good rule of thumb is to set aside 20-25 percent of your total startup costs for contingencies.
After reading the Startup Expenses & Capitalization section, the reader should know how much money is needed to start the business and how well capitalized you are.
8. Financial Plan
Your financial plan is perhaps the most important element of your business plan. Lenders and investors will review it with great detail. Developing your financial plan helps you set financial goals for your startup and assess its financing needs.
The 12-month profit & loss projection
Also known as an income statement or P&L, is the 12-month profit and loss projection are the centerpiece of your business plan. Be sure to explain the assumptions behind the numbers in your P&L. Keep detailed notes about how you came up with these figures. You may need this information to answer questions from potential financing sources.
Include an optional 3-year profit & loss projection.
A three-year profit and loss projection is not essential to a business plan. However, you may want to create one if you expect your business’s financials to change substantially after the first year, or if investors or lenders require it.
The cash flow statement
Tracks how much cash your business has on hand at any given time. Once your business is up and running, you’ll want to keep close tabs on your cash flow statement.
For now, however, you’re creating a cash flow projection. Think of the cash flow projection as a forecast for your business checking account. It details when you need to spend money on things such as inventory, rent, payroll, and when you expect to receive payments from customers and clients.
For example, you may make a sale, need to buy inventory to fulfill the sale, and not collect payment from the customer for 30, 60, or 90 days. The cash flow projection takes these factors into account, helping you budget for upcoming expenses so your business doesn’t run out of money.
If you’re using the business plan to seek financing from lenders or investors, provide a breakdown of how you will use the capital and what results you expect. For example, perhaps you will use the money to buy new equipment and expect that to double your production capacity.
After reading the Financial Plan section, the reader should understand the assumptions behind your financial projections and be able to judge whether these projections are realistic.
9. Appendices
Don’t slow your readers down by cluttering your business plan with supporting documents, such as contracts or licenses. Instead, put these documents in the Appendices, and refer to them in the body of the plan so readers can find them if needed.
You can also include any other materials that will give readers a fuller picture of your business or support the projections and assumptions you make in your plan. For instance, you might want to include photos of your proposed location, illustrations or photos of a product you are patenting, or charts showing the projected growth of your market. After reviewing the Appendices, the reader should feel satisfied that the assumptions throughout the plan are backed up by documentation and evidence.
At this point don’t forget to go back and write your Executive Summary.
Finally, a good business plan is clear and concise.
A person outside of your industry should be able to read the 9 critical elements of your business plan and fully understand them. Avoid overusing industry jargon and terminology. Most of the time involved in writing your plan should be spent researching, making sure to document your research and findings, and including the sources of any information you include in the plan.
Avoid making unsubstantiated claims or sweeping statements.
Investors, lenders, and others reading your plan will want to see realistic projections and expect your assumptions to be supported with facts.
It’s very important that aspiring entrepreneurs understand research is a critical component of a solid business plan. For more entrepreneurial resources, click here.
SOURCES: The U.S. Small Business Administration. The Indiana Small Business Development Center. SmartAsset, personalized financial tools.