Dagobert is looking for financing to expand his clothing wholesale business. Given his significant funding requirements, all his bankers are requesting a business plan from him to make a better assessment of his expansion project.
After surveying the recruiting cost of a business plan specialists and business plan templates over the internet, Dagobert decides to do the business plan himself using a template downloaded from the web. Three months later, Dagobert ends up with a written document that reflects neither his original idea nor his bankers’ expectations. Had he been properly trained on the arts of business plan writing, he would have likely found a more successful outcome. Dagobert’s story is not uncommon to the myriad of entrepreneurs seeking to advance their ventures.
This article’s aim is to explain best practices in the development of a business plan. We begin by defining what a business plan is, we elaborate on its structure, and provide insights into the craft of writing such business reports.
WHAT IS A BUSINESS PLAN?
When attempting to raise money, recruiting a star team member, or developing a corporate development strategy, you will often be required to provide a business plan to entice parties to work with you. A business plan is a document that defines your business (or at the least, what you intend it to be), outlines how you plan to accomplish your goals in practical terms, helps to understand the resources required to accomplish your project and assess potential returns to capture if the plan is adequately implemented.
Depending on your target reading audience and your funding needs, you may be required to show pitch decks, information memoranda, corporate presentations, market research reports and/or a range of financial models, which are all business documents with more or less the same objectives as a regular business plan.
A proper business plan comprises the following contents:
EXECUTIVE SUMMARY
In this section, you should summarize and recount the complete story of your business plan. All of the critical subsections in the document should be touched upon in the executive summary, and you need to ensure that the content is concise and exhaustive. If done properly, it will ensure that during meetings you will only need to refer to the different subsections if it is necessary to zero in on a specific section.
The standard approach is to outline the executive summary section first when starting to write a business plan to help you structure the following sections of the plan, then return to the executive summary to finalize it once all the other sections are written. A better approach would be to write this section only after the core sections because you would essentially be summarizing core sections you have already written and gathered sufficient information to put forth inquisitive thoughts.
COMPANY OVERVIEW
The main goal of this section is to make sure that the reader understands what the company does. As a rule of thumb, try to keep it simple, identify the problem that is being addressed, and present your company’s solution.
Moreover, this section should include other relevant information about the company such as the corporate structure, the time and circumstances when the company was founded and the milestones that have been achieved. Any examples of traction are great to establish a basis that the company and its founders are able to execute.
MARKET ANALYSIS
Here, you need to communicate two key pieces of information: the main characteristics and trends in your market, with a rough approximation of the market’s size, historic and projected growth rates.
After having defined the market trends, you must then explain your market size in detail. To better grasp this issue and apply it, you can find a lot of literature on the subject. Preparing a total addressable market (TAM) report can bring an edge to your market analysis with strong figures to back up your claims.
COMPETITOR ANALYSIS
In this section, you must lay out the current competitor landscape. Make sure that it is as comprehensive as possible, taking into account not only current competitors but also potential future competitors. For instance, is a company in another market close to expanding into your market? Or, is a foreign company likely to enter your turf?
Furthemore, pay attention to map out indirect competitors and their market dynamics. In the process of analysing competitor analysis is it important to identify their weaknesses as well as their competitive advantages along with their ability to sustain those advantages overtime. Performing benchmarking analyses is often key for addressing this section.
CUSTOMER ANALYSIS
In the customer analysis section, you need to prove that there are actually real customers that will pay/use/download your product. Use this space to drill down into the psychographics of the customer. Where are they, what real problem do they have that needs to be addressed, and what is their profile? It is very useful to define some specific characteristics, such as gender, age, geographical location, marital status, family, and main consumption patterns.
Even though most of the time entrepreneurs gather this kind of information from secondary sources such as research reports, we strongly recommend to conduct primary interviews with potential customers. Prepare a questionnaire, speak to potential customers, and analyse the intelligence gathered. It is surprising how many important perspectives can be obtained from primary research.
MARKETING STRATEGY
Here, you will need to detail how the plan to actually get your product to market. This will include, but not be limited to defining the products to address the market you have identified; clarifying the marketing channels intended to be used, laying out the pricing strategy and the rationale behind your choice.
Make sure that you show your knowledge of all of the intricacies of your marketing initiatives. In this section, it is very useful to detail any marketing initiatives you have already executed and their results. Consultants come in handy in development of pricing and monetizing models to enhance your marketing efforts.
OPERATIONS/TECHNOLOGY STRATEGY
This part relates to exploiting any operational or technological advantages relative to competitors. Key competencies over your competitors for commercial gain, such as a superior logistics platform should be highlighted.
Moreover, it is important to define the main operational areas within your company, even if some of those functions have not yet been developed. This can lay out a roadmap for the future, such as a plan to introduce a dedicated customer service team.
MANAGEMENT TEAM
There are some investors who claim they invest ‘in the team, not the product’. This mindset is based upon the premise that strong and well-rounded teams are essential to make a company become successful.
There are two main aspects to be covered in this section: the actual executive management team and the investor team. In the executive management team, make sure to detail why the team is a great fit for the business in terms of experience and capabilities. It is also important to state what their specific roles are and if they have stock or stock options and under what conditions. Also, any information on their synergies of working together as a team will be very useful for potential investors, as it de-risks future management team dysfunctions.
FINANCIAL PLAN
In parallel to your business plan, you should also build a detailed financial business plan that shows all the assumptions, drivers, and financial statements of your business for the next 3 to 5 years. This financial business plan should have several scenarios (conservative, base, aggressive) and allow for the quick tweaking of assumptions. The financial statements developed should, at a minimum, include cash flow, balance sheet, and profit and loss statements, although more ad hoc analysis such as unit economics P&L can add value.
Both documents, the written business plan and the financial business plan model, will feed into each other and help with different parts of their respective content.
In this section, you need to include the main financial projections that resulted from your financial business plan in a summarized and graphic manner. A good rule of thumb is to include at least the yearly P&L and cash flow statements of the main scenarios expected, but you can go into as much detail as you see fit.
Without a doubt, this section is one of the most technical and knowledge-specific parts of the document. Not many people know how to build detailed financial statements. Therefore, it is useful to consider hiring finance experts with significant know-how to ensure that you build the most suitable financial statements possible for the launch of your business.
FINANCING REQUIREMENTS/THE ASK
This section is often part of the financial plan. However, given its importance to investors we recommend dedicating an entire section for it. The goal of this section is to articulate how much capital you need, elaborate how the funds would be utilized and assess the expected investments returns.
When outlaying funding needs, it is important to not only state how the capital raised would be invested but also show your preferred funding structure (i.e. the proportion of capital raised in debt versus equity).
Properly addressing this subject can reveal your level of commitment and confidence into your venture. It also hints investors at your financial acumen.
In presenting potential investments returns, bear in mind that investors have different return expectations and risk tolerances. Therefore, you will not necessarily win over investors by presenting astronomical investment returns. The key is to show 1) that you acknowledge certain risks associated with your venture, 2) that you have planned measures to mitigate those risks, and 3) that you can still achieve profitability regardless of the circumstances. Contrarily to popular beliefs, investors are more afraid to lose money than they are willing to earn investments returns. Here again would do yourself great service by soliciting assistance from a trained investment professional in this section.
WHAT ELSE SHOULD YOU CONSIDER?
You need to ensure that the content is ambitious, but grounded in reality. Backup any claims made with specific data. For example, stating that your company will provide the best in-market customer experience will not be enough. Supporting this claim by asserting that your NPS Score is above 80, would be more convincing. Depending on the target audience of your business plan, you may have to emphasize certain sections over others.
Further, hiring with consultants in the development of a business plan can save you a lot time and efforts. They can help bring more depth and breadth to your document by providing contingent analysis. Such analysis include but are not limited to TAM reports, customer acquisition cost analysis, product pricing & monetization models and financial models to articulate your business projects. The key to working with consultants is to review and provide feedback regularly on their work, acknowledging that despite your field experience they can also always stress test your ideas, analyse and interpret them in ways you would have never preconceived.
To all the Dagoberts out there, keep in mind that a business plan cannot guarantee project success. However, studies have shown that projects with good business plans are 2.5x more likely to find financing. Projects good business plans are 16% more likely to be profitable after 2 years. A business plan is first and foremost a compass to limit business risks and guide the development of the strategy.
By Arnold A. KAMANKE, Founding Consultant of Negus Advisory and ACPI Member