Impress Investors with a Professional Business Plan

Daedalus By Daedalus, 21st May 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/lga29aif/
Posted in Wikinut>Business>Starting A Business

No one plans to fail; they simply fail to plan. Any potential investor, including all the major banks, will want to see a professionally thought out, well prepeared Business Plan. If you don't have one and don't know where to start, this handy guide will take you through all of the options in a logical, sequential way, making it easy for you to create your own plan.

A Business Plan

There are many different formats for business plans; some are highly detailed and complex and some are quite simply and straightforward. Of course, it's all dependent upon what your business is and its relative complexity or simplicity, the scale of your business, local, national or global, and whether you actually need to ask for money from anyone.

In this article I have assumed that, whatever the business type, you need funding from somewhere and so the elements included are just those that you will need to emphasise, to achieve that goal. It doesn't mean that you shouldn't include other things in your business plan (I've given a full list of potential inclusions at the very end); just that these are tthose areas worthy of particular note in this circumstance.

Company Description

Chances are you’ve already decided what business you’re going to be in and what you will do but don’t assume your bank or other investors know about your business. Describe it fully and don’t use abbreviations. Spell out, in simple terms, what your business is, what sectors you’ll be in and what services you’ll offer.

Next you need to complete a ‘Mission Statement.’ Many companies have a brief mission statement, usually in 30 words or fewer, explaining their reason for being and their guiding principles. If you want to draft a mission statement, this is a good place to put it in the plan, followed by company Goals and Objectives: Goals are destinations—where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be annual sales targets and some specific measures of customer satisfaction.

All investors will want to know who your customers will be and how you will market your products or services. You should state it briefly here, but you will do a more thorough explanation in the Marketing Plan section.

Now describe your industry. Is it a growth industry? What changes do you foresee in the industry, short term and long term? How will your company be poised to take advantage of them? This is all about persuading people that, not only are you on top of any changes in your industry or sector, but also that you have a clear target market.

Follow this up by describing your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture? Any experience you have and unique selling points you can bring to the table will strengthen your proposal.

Finally, decide what legal form of ownership you’re going to have. Will you be a Sole Proprietor, Partnership, Corporation, Limited liability Corporation (LLC) or Social Enterprise and why have you selected this form? The type of organisation you select will have different tax liabilities and different responsibilities for Directors. A full guide of what type of business you should be is given on http://www.companieshouse.gov.uk/

Products and Services

You should dedicate a separate page where you can go into more detail about your products or services. You should include technical specifications, drawings, photos, sales brochures, and give details of any websites (or associated blogs, facebook advertising etc) you have already set up.

When that is done, go on to describe what factors will give you competitive advantages or disadvantages? Examples of advantages include level of quality or unique or proprietary features, price and perhaps a level of after sales sevrice not offered elsewhere. Be honest about any disadvantages you may have. There’s nothing wrong with admitting weaknesses; working to eliminate, overcome or reduce weaknesses or ‘risks’ demonstrates how thoroughly you have thought about your business AND shows a degree of forward thinking and planning. If you do this though, be sure that you SHOW how these weak areas will be mitigated in subsequent years’ trading and business plans.

The final part of this section should show the pricing, fee, or leasing structures of your products or services. Demonstrate that you have done some research into your competitors’ pricing structures so that your investors can see that your prices are competitive.

Marketing Plan

A Marketing plan demonstrates how you are going to bring your products or services to the market; how you're going to win customers and how you're going to maintain levels of interest for subsequent years. Marketing isn't just about advertising or PR. Marketing includes a lot of forethought and future planning. When interest in your current prodcust or services start to wane, what are you going to bring to the market to raise interests levels again and again, and again?

Market research - Why? No matter how good your product and your service, the venture cannot succeed without effective marketing. And this begins with careful, systematic research. It is very dangerous to assume that you already know about your intended market. You need to do market research to make sure you’re on track. Use the business planning process as your opportunity to uncover data and to question your marketing efforts. Your time will be well spent.

Market research - How? There are two kinds of market research: primary and secondary.

Primary research means gathering your own data. For example, you could do your own traffic count at a proposed location, use the yellow pages to identify competitors, and do surveys or focus-group interviews to learn about consumer preferences. You might even set up a blog or a facebook page and ask pertinent questions. Professional market research can be very costly, but there are many books that show small business owners how to do effective research.

Secondary research means using published information such as industry profiles, trade journals, newspapers, magazines, census data, and demographic profiles. This type of information is available in public libraries, industry associations, chambers of commerce, from vendors who sell to your industry, and from government agencies, with much of it available online.

Start with your local library. Most librarians are pleased to guide you through their business data collection. You will be amazed at what is there. There are more online sources than you could possibly use. Your chamber of commerce has good information on the local area. Trade associations and trade publications often have excellent industry-specific data.

In your marketing plan, be as specific as possible; give statistics, numbers, and sources. The marketing plan will be the basis, later on, of the all-important sales projection.

Economics

When you do your marketing plan, it's extremely important to think about economics. Right now we're in the midst of a recession, or as good as. Individuals and companies are cutting back personal and commercial spending on a wide range of goods and services. Consider whether your business will be affected by austerity measures.
ask yourself the following things about your industry:
What is the total size of your market?
What percent share of the market will you have? (This is important only if you think you will be a major factor in the market.)
Current demand in target market.
Trends in target market—growth trends, trends in consumer preferences, and trends in product development.
Growth potential and opportunity for a business of your size.
What barriers to entry do you face in entering this market with your new company? Some typical barriers are:
High capital costs
High production costs
High marketing costs
Consumer acceptance and brand recognition
Training and skills
Unique technology and patents
Unions
Shipping costs
Tariff barriers and quotas

And of course, how will you overcome the barriers?

How could the following affect your company?
Change in technology
Change in government regulations
Change in the economy
Change in your industry
Product
In the Products and Services section, you described your products and services as you see them. Now describe them from your customers’ point of view and if you find this difficult, then here's where the market research answers (from your facebook page or blog) will assist you.

Features and Benefits

Although you need to be realistic and acknowledge any difficulties and barriers, you also need to 'hard sell' the key features and befits of your goods and services. The first thing to do then is make a list all of your major products or services. And then, for each product or service:
Describe the most important features. What is special about it?
Describe the benefits. That is, what will the product do for the customer?
Note the difference between features and benefits, and think about them. For example, a house that gives shelter and lasts a long time is made with certain materials and to a certain design; those are its features. Its benefits include pride of ownership, financial security, providing for the family, and inclusion in a neighborhood. You build features into your product so that you can sell the benefits.

Consider after-sale services will you give? Some examples are delivery, warranty, service contracts, support, follow-up, and refund policy.

And for your customers; Identify your targeted customers, their characteristics, and their geographic locations, otherwise known as their demographics.

The description will be completely different depending on whether you plan to sell to other businesses or directly to consumers. If you sell a consumer product, but sell it through a channel of distributors, wholesalers, and retailers, you must carefully analyze both the end consumer and the middleman businesses to which you sell.
You may have more than one customer group. Identify the most important groups. Then, for each customer group, construct what is called a demographic profile:
Age
Gender
Location
Income level
Social class and occupation
Education
Other (specific to your industry)
Other (specific to your industry)
For business customers, the demographic factors might be:
Industry (or portion of an industry)
Location
Size of firm
Quality, technology, and price preferences
Other (specific to your industry)
Other (specific to your industry)

Competition
What products and companies will compete with you? Clearly competitors impact on your sales forecast, your pricing structure and quite possibly even the geographic area in whichyou intend to compete. List your major competitors complete with names and addresses and of each, ask the following questions:
Will they compete with you across the board, or just for certain products, certain customers, or in certain locations?
Will you have important indirect competitors? (For example, DVD rental stores compete with theaters, although they are different types of businesses.)
How will your products or services compare with the competition?
I recommend setting up a 'Competitive Analysis Table' to compare your company with your two most important competitors. In the first column list they key competitive factors. Since these vary from one industry to another, you will need to customize a list of factors.
Label the next column 'Me' and state how you honestly think you will stack up in customers' minds. Then check whether you think each factor will be a strength or a weakness for you. Sometimes it is hard to analyse our own weaknesses. Try to be very honest here. Better yet, get some disinterested strangers to assess you. This can be a real eye-opener. And remember that you cannot be all things to all people. In fact, trying to be causes many business failures because efforts become scattered and diluted. You want an honest assessment of your firm's strong and weak points.

Once that's done analyse each major competitor. In a few words, state how you think they compare.
In the final column, estimate the importance of each competitive factor to the customer. 1 = critical; 5 = not very important.
Finally, write a short paragraph stating your competitive advantages and disadvantages.

Now that you have systematically analyzed your industry, your product, your customers, and the competition, you should have a clear picture of where your company fits into the world. In one short paragraph, define your niche; your unique corner of the market.

Pricing

Pricing is clearly a crucial factor no matter what type of business you're in but try to stay away from the 'cheapest is best' mind-set. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin. Customers may not care as much about price as you think; and large competitors can under price you anyway. Usually you will do better to have average prices and compete on quality and service.

Does your pricing strategy fit with what was revealed in your competitive analysis?
Compare your prices with those of the competition. Are they higher, lower, the same? Why?
How important is price as a competitive factor? Do your intended customers really make their purchase decisions mostly on price?

Remember, anyone can be a 'busy fool.' Working cheaply most often means working for nothing. If, after you have sold your goods or services and factored in the amount of time you have spent doing it, if there's no profit, you're wasting your time. All good businesses have one aim; to make a profit, and you should too!

Start-Up Expenses and Capitalisation

You will have many start-up expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them.

Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach I recommend.

Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, I recommend that contingencies should equal at least 20 percent of the total of all other start-up expenses.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each

Your Financial Plan

The Financial Plan consists of a 12-month profit and loss projection, a four-year profit and loss projection , a cash-flow projection, a projected balance sheet, and a break-even calculation. Together they constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.

12-Month Profit and Loss Projection
Many business owners think of the 12-month profit and loss projection as the centerpiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful.
Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year. Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.

Research Notes
Keep careful notes on your research and assumptions, so that you can explain them later if necessary, and also so that you can go back to your sources when it’s time to revise your plan.

Four-Year Profit Projection
The 12-month projection is the heart of your financial plan. This section is for those who want to carry their forecasts beyond the first year. Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.

Projected Cash Flow
If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.
The point of creating this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves and you should keep updating it and using it afterwards. It will enable you to foresee shortages and allow you time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise.

There is no great trick to preparing it: The cash-flow projection is just a forward look at your checking account.
For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a cheque (for expense items).

You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases. You should also track cash outlays prior to opening in a pre-startup column. You should have already researched those for your startup expenses plan.

Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict when and how much you will need to borrow.

Always explain your major assumptions, especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow?
Are some expenses payable in advance and if so when? Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup, that need to be budgeted for?

Loan payments, equipment purchases, and owner's draws usually do not show on profit and loss statements but definitely do take cash out. Be sure to include them. And of course, depreciation does not appear in the cash flow at all because you never write a cheque for it.

Opening Day Balance Sheet
A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.
Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.
Some people add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors.

Banks and Investors

Banks and private investors will want to see slightly different things.

For Banks
Bankers want assurance of orderly repayment and some tangible assets upon which they could realise their investment, should you fail to make a profit. If you intend using this plan to present to lenders, include:
Amount of loan
How the funds will be used
What this will accomplish—how will it make the business stronger?
Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate but may be able to negotiate a longer repayment term, which will help cash flow.
Collateral offered, and a list of all existing liens against collateral

For Investors
Investors have a different perspective. They are looking for dramatic growth, and they expect to share in the rewards(Has anyone watched Dragons' Den?) The emphasis for investors are:
Funds needed short-term
Funds needed in two to five years
How the company will use the funds, and what this will accomplish for growth.
Estimated return on investment
Exit strategy for investors (buyback, sale, or IPO)
Percent of ownership that you will give up to investors
Milestones or conditions that you will accept
Financial reporting to be provided
Involvement of investors on the board or in management

An emphasis on these things, dependent on where and to whom you're going for your funding, will increase your score and therefore your chances of getting what you want.

Other things you could include

Different Industries, businesses and services all have slightly different requirements. Here's a check-list of additional things to include in your plan, for several different business types.

Manufacturing
Planned production levels
Anticipated levels of direct production costs and indirect (overhead) costs—how do these compare to industry averages (if available)?
Prices per product line
Gross profit margin, overall and for each product line
Production/capacity limits of planned physical plant
Production/capacity limits of equipment
Purchasing and inventory management procedures
New products under development or anticipated to come online after startup

Service Businesses
Service businesses sell intangible products. They are usually more flexible than other types of businesses, but they also have higher labor costs and generally very little in fixed assets.
What are the key competitive factors in this industry?
Your prices
Methods used to set prices
System of production management
Quality control procedures. Standard or accepted industry quality standards.
How will you measure labor productivity?
Percent of work subcontracted to other firms. Will you make a profit on subcontracting?
Credit, payment, and collections policies and procedures
Strategy for keeping client base

High Technology Companies
Economic outlook for the industry
Will the company have information systems in place to manage rapidly changing prices, costs, and markets?
Will you be on the cutting edge with your products and services?
What is the status of research and development? And what is required to:
Bring product/service to market?
Keep the company competitive?
How does the company:
Protect intellectual property?
Avoid technological obsolescence?
Supply necessary capital?
Retain key personnel?
High-tech companies sometimes have to operate for a long time without profits and sometimes even without sales. If this fits your situation, a banker probably will not want to lend to you. Venture capitalists may invest, but your story must be very good. You must do longer-term financial forecasts to show when profit take-off is expected to occur. And your assumptions must be well documented and well argued.

Retail Business
Company image
Pricing:
Explain markup policies.
Prices should be profitable, competitive, and in accordance with company image.
Inventory:
Selection and price should be consistent with company image.
Inventory level: Find industry average numbers for annual inventory turnover rate (available in RMA book). Multiply your initial inventory investment by the average turnover rate. The result should be at least equal to your projected first year's cost of goods sold. If it is not, you may not have enough budgeted for startup inventory.
Customer service policies: These should be competitive and in accord with company image.
Location: Does it give the exposure that you need? Is it convenient for customers? Is it consistent with company image?
Promotion: Methods used, cost. Does it project a consistent company image?
Credit: Do you extend credit to customers? If yes, do you really need to, and do you factor the cost into prices?

Conclusion

There is no reason why, with careful planning and attention to detail, that your business plan should fail to win you the investment you need. As I said at the beginning, no one plans to fail, they just fail to plan. Investors want you to succeed, after all, it';s how they make their money and without good businesses and good people to drive those businesses, they don't make anything!
Be thorough, be professional and be honest. Ask for what you need and no more and back it with evidence. So these things and you'll find you have a willing audience!

Tags

Business, Comprehensive, Plan, Professional, Start Your Business, Start-Up, Start-Up Business, Starting A Business, Starting A New Business

Meet the author

author avatar Daedalus
Freelance writer, author, literary agent and writing teacher for 23 years. Have tended to speailise in business, education and history; published in 30+ countries.

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Comments

author avatar Retired
22nd May 2012 (#)

This article is useful and informative for someone who is in business or want to start a business.
Good work!

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author avatar Daedalus
30th May 2013 (#)

Thank you - that is most kind; it's nice to know that my work is appreciated

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