How to Write a Good Business Plan?
There are tons of articles and books on how to write a good business plan, but still I get a lot of questions on how to write a business plan effectively.
In this article I’ll show you (1) what a business plan is, (2) why, when and for whom to write the business plan, and (3) the elements of a good business plan.
WHAT IS A BUSINESS PLAN
A business plan is a 30-40 pages long description of how you want to build your company. In the business plan you want to explain what customers you want to target via which marketing channels, what makes you different from competitors, who the management team is, how you are going to make a profit, and what the milestones are for achieving your business plan. So, in a nutshell a good business plan follows the following story.
WHY, WHEN AND FOR WHOM
Why make the effort and writing 30-40 pages when you could focus on product development or sales? There are several reasons why with some business models you should only write an abbreviated version of a business plan (we will cover this in another post).
- Generally, while writing a business plan you and your co-founders will think through your business model in-depth. By doing this you will increase the probability to find business model breakers (= factors that will lead your current model fail), so you can find ways to adjust your business model.
- The second reason is that when you write a business plan, you set yourself a guideline which to follow. This will increase your focus and get things done mentality as you target your milestones.
- Another reason for writing a business plan is that most of investors (especially venture capitalist and banks) will ask for a business plan before they will make an investment decision.
Most people start working on a rough business plan too late. We recommend that you write a business plan when you have a good business idea. It is totally fine to have a first business plan covering the key business model drivers and milestones you want to achieve on 3-5 pages. Once you learn what customers really want and how to profit then you increase the detail of your business plan (e.g. start with rough marketing assumptions and later distinguish between marketing channels, customer segments, products and regions). Now, you might need some funding because you are not profitable yet or because you want to finance a larger expansion (more products, more countries). For this, you will need to write a very detailed business plan which will be the basis for investors to make their decision to invest in your business or not. This fully fledged business plan is what we are talking about in this article.
The external purpose of the business plan is mainly to receive funding (equity or debt), thus the potential addressees of the business plan can be:
- Equity investors like business angels and venture capitalists
- Debt investors like banks
It is important to frame the information in the business plan to the needs and investment profile of the investors. For pitching equity investors you should focus on the disruptive factors and upside potential of your business while for debt investors you should clearly state the risks and position yourself as a risk minimizer (I mean, your business has no risk it cannot handle, hasn’t it 🙂 ).
ELEMENTS OF A BUSINESS PLAN
There is no perfect blueprint for a good business plan, but the following elements are definitely part of a good business plan. When you write your business plan you should focus on quality (facts, crisp, simple English), not quantity. As a starting point you can use this or that free business plan template.
This means you’ll have to be very specific about your business model, because investors get hundreds of business plans every month, so make sure your business plan stands out from the crowd. We recommend, you ask your friends and family for input on how to improve your business plan. After each investor meeting, use their feedback for sharpending your pitch and business plan. A good quality business plan will increase your chances of getting funded.
1 EXECUTIVE SUMMARY
The executive summary should summarize the main messages from the whole business plan, while the further elements of the business plan should provide the supporting facts for these messages. The executive summary typically is 1-2 pages long.
In this section you describe the management team and other key people attached to your business (e.g. board of directors, key employees). A potential is mostly interested in what specific industry expertise, technical skills and business network you have in order to drive the business growth. One key skill, I find most people overlook, is that management should master the skill of allocating capital in the most efficient way.
Furthermore, you should show that your team is complementary meaning that the management team should have different backgrounds; this helps in making hard decisions as the whole team sees the problem from different perspectives.
3 PROBLEM, MARKET, AND COMPETITORS
First, you need to specify what problem you would like to solve with your business. Be as specific as possible. The more precise you describe the problem, the better your solution will be and thereby you will increase your chances of success.
- Bad example: People have cancer.
- Good example: People have cancer and I know why. I found the biological reason for the existence of cancer in chromosome 0815 which is driven by malnutrition in the early childhood mainly caused by visiting McDonalds too often [I totally made this up, I don’t have a biology background 🙂 ]
Then, you need to estimate the current and future market size for solving this problem either via market research reports or a back on the envelope calculation.
Lastly, what competitors are out there and how do they tackle this problem? A lost of people think, they don’t have competitors. Let me assure you, you have competitors. Either you have competitors that offer a similar product or at least you will competitors who try to solve the customer problem in another way.
- Example: Imagine you want to sell a super new type of juice which nobody sells. Cool, you don’t have competitors! WRONG! Every company that sells any type of drinks (e.g. water, juice, tea, coffee) is competing for satisfying the thirst and taste of customers.
Show the investors in your business plan how you will position your business in comparison to the competition.
Here you describe how your product or service solves the problem. Make sure you describe why your product or service solves the problem in a more effective or efficient way, so you will have a value proposition over competitors.
Your business plan should also specify the customer benefits of your product (making something faster, cheaper, more reliable, more effective, more beautiful). This discussion will later help you to pitch your product to potential customers.
Briefly explain how you source and produce the product and how this might translate into a competitive advantage. If you have any sourcing or production related partnerships, then state them here. This might also indicate some traction.
5 MARKETING AND SALES
You have your product defined and why customers should buy your product.
Now, you need to show which advertising and sales channels you want to use for approaching potential customers. You need to show which channels have the lowest customer acquisition cost, amount of customers and product perferences of customers.
Generally, you can advertize your product via these advertising channels:
- Offline marketing; using guerilla marketing techniques, advertising on public transport, radio and television advertising.
- Print advertising; putting your advertising on newspapers or magazines
- Search engine marketing, you bid for key words on google, bing and yahoo.
- Display advertising; you buy ad impressions of larger websites, so that customers can click through to your website.
- Search engine optimization; your website gets visitors from google & co. by ranking high for specific key words (e.g. business plan, greatest entrepreneur ever, startups)
- Retargeting; you try to retarget visitors that have visited your website by showing them specific ads on selected other websites.
- Paid social media; you advertize your product on Facebook, Twitter, Linkedin and co.
Furthermore, your business plan should state whether you already have some signed marketing or sales partnerships. One technique, I like a lot, is the piggy back. When you have developed a specific product and you can piggy back on a larger distributor to sell your product to thousands of people. Example: If you have developed an amazing web application for entreprise resource planning, then it might make sense to talk to companies like Cisco or HP for promoting your product by having a revenue share agreement with the distributor.
6 FINANCIAL PLAN
At least one member of your management team should understand the basics of accounting so you can build a decent financial plan.
The financial plan should at least include a historical and forecasted income statement so that investors get a feeling for the revenue forecast, margin forecast, and overhead forecast. If you are awesome 🙂 , then build an integrated financial model that interlinks the income statement, balance sheet and cash flow statement.
Next, you should show investors why your business is a good investment. Basically, an investor will assess the risk and return of investing in your business relative to other investment opportunities he might have. I recommend, you help the investor by calculating the IRR fo your business and identifying the mayor business model risks and measures how you tackle those risks.
Lastly, the investor wants to know how much funding you need and for what (e.g. marketing, HR, product development, having a party 🙂 ) you plan to spend it.
7 ROADMAP AND MILESTONES
If you don’t know where you wanna go, then your chances of getting there are quite low! Therefore, you should specify what actions you want to perform and what objectives you want to achieve over a specific period of time; this is called a milestones plan.
The milestones plan should be categorized by business segments such as product development, marketing, HR, and finance and include the funding need for each milestone.
We will look at business plans in more detail in future posts. This article should give you a good introduction what a business plan is and what things you need to consider for writing a good business plan.