When starting a business, a business plan is one of the most important documents that one will need in order to be successful. It will explain your business, show your objectives, and illustrate how you will succeed. Unfortunately, many entrepreneurs take the wrong approach when business ideas dawn on them. The common mistake they make is that they think about a business venture but keep the entire blueprint in their heads. Consequently, not having written ideas become especially problematic when they begin to seek funding from investors or lenders or try to convince others that their business is credible. Therefore, the need to understand business plans is paramount, so let’s take a look at this important document.
What is a Business Plan?
A business plan is a set of documents prepared by a firm's management to summarize its operational and financial objectives for the near future of about, usually one to three years, and it shows how they will be achieved. It serves as a blueprint to guide the company's policies and strategies, and it is continually modified as conditions change and new opportunities and/or threats emerge. When prepared for an external audience such as lenders or prospective investors it details the past, present, and forecasted performance of the firm. A business plan also contains a pro-forma balance sheet, income statement, and cash flow statement to illustrate how the financing being sought will affect the firm's financial position.
An important point to note is that the formality of a business plan depends on the situation. Therefore, a formal well-structured document is not always necessary. For instance, if the plan is for internal uses, the entrepreneur can have an informal document as a guide.
Why Make a Business Plan?
There are different reasons why someone may need a business plan. While some may be obvious, other unclear reasons exist. Some of these include:
For a loan application- When seeking a loan for your business, lenders will want to see a document that highlights how your business will make money to pay them back.
Investors- Just like lenders, investors want to see a formal document that shows how you will make money and by extension how they will make money from their investment.
Starting a new business- This may be more obvious than the others; however, as previously stated, a business plan is needed to aid in starting a business.
To avoid making mistakes- Not every business idea can manifest into a business, so creating a plan can help identify a potentially bad business venture from the inception before resources are invested.
There are many more situations that require entrepreneurs to have a business plan; however, the above reasons are few of the main ones
Who needs a business plan?
Different views exist about the necessity of business plans. However, as previously stated, having your business idea and blueprint only in your head lessens your credibility when compared to having it on paper. Therefore, it is advised that entrepreneurs starting a business, business owners looking to grow their business as well as executives who are seeking to ensure everyone within the business are on the same page all have business plan.
Common Mistakes to Avoid when Creating a Business Plan
When writing a business plan, there are some mistakes to avoid. Three of these include:
Idea inflation- This involves overstating the idea and the need the product will fulfill. Some people are passionate about their idea and will try to make it more than it really is.
- Having vague goals- Goals should always be specific, measurable, accurate, relevant, and timely. Some entrepreneurs keep their goals ambiguous which then lead to vague outcomes.
- Having unrealistic financial projections- In an effort to show that their business will make a profit, some entrepreneurs inflate their numbers on paper. Such an approach should be avoided at all cost since it could save you from wasting resources.
How to write a Business Plan
Business plans contain different components, but different business plan consultants and entrepreneurs are not always in accordance with all the parts of a plan. While some argue that it is not necessary, the business plan can certainly increase your chances of success. The following are the main components every business plan should contain.
Mission and Vision Statement- This section highlights your business’ current state of affairs and its forecast. Your mission statement highlights why you exist. It should be a one sentence statement that highlights why your business or product exist. Your Vision statement should highlight the clear and long term change that will result from your work. Ask yourself, what needs to be changed, why it should be changed and what the end result you will want to see is.
Company Description- It discusses what your company is about and describes the products and the needs they are going to fulfill. This is usually the second section to appear on a business plan. This should contain the business name, the type of business structure, ownership, and location, history of business, products and services and well as target market and the objectives of the plan.
Unique Selling Proposition- It illustrates how your product or service will be different and what makes your potential business special. When identifying your USP, get to know your ideal customer inside out, understand how your product will solve customers’ problems, customers do not buy products, they buy solutions to their problems finally, make your business irressistible, people need to know why they should choose your business over some other business.
Market Analysis- This area discusses the market you are trying to enter, the competition, and whether you will be able to get a piece of the market share. Your market analysis should include, a description of your industry and its outlook, identify who is your target market, the competitive landscape of the industry, who are your competitors. You also need to know all projections such as the share of the market you will get and revenue projection and also any regulations that can affect you doing business.
Management- In this section, you will discuss the key players on your team, their expertise, experience, and qualifications. Here you will highlight the main players on your team, their roles. Create an organization structure to show the different levels of the organization.
Marketing Plan- It highlights how you plan to market your business, whether you will use traditional marketing methods, online marketing, and/or other more modern methods. There are 4 component of your marketing plan, first one is your Target Market which you already highlighted, and here you go more in-depth. You then need to know your marketing positioning. How is your product of service perceived by the customers? You then need to highlight your pricing strategy as well as your promotion strategy which includes, advertising, sales promotion, public relation and personal selling.
SWOT Analysis- This part of the plan indicates your company’s strengths, weaknesses, and opportunities and threats present.
Cash Flow Statement- This is a crucial segment of your business plan since you will need to know the cash needs of your business to avoid running out of funds. Cash flow statement highlights where your money is coming from, whether sales, loans, grants etc as well as your expenditure in your business.
Revenue- This section will forecast the amount of money your business is expected to make.
Alternatives- In this section, the entrepreneur illustrates the actions that he/she will take if the other areas of your plan and your business do follow your predictions.
Executive Summary- This is the last part in a written business plan. However, it is quite crucial since it is the first section people read when they look at your plan. This area should highlight the main points of your business plan and pull everything together.
In conclusion, a business plan is essential regardless the stage your business is in. However, it is particularly critical for start-up entrepreneurs and those who are in the early phases of putting their business ideas together. Admittedly, business plans are of utmost importance because they can be the difference between a business’ success and failure. Therefore, if you are going to create a business plan, the information contained in this article will be able to guide you while you produce a robust document.