The Myths of Business Planning

One of the biggest misconceptions about building a business plan is that an entrepreneur only needs one if they are seeking external funding.  However, one of the critical aspects of starting a business is first determining its feasibility, marketability, and profitability.  Many times, even “boot-strapping” a business would be better served if a business plan was in place.  So why isn’t a business plan only written for the purpose of raising capital?

In reality, the business plan is a process.  While many entrepreneurs go through the mental exercise of planning their business, following a logical structure will ensure that key aspects of the idea are analyzed.  While it may take time, it can potentially save money by minimizing the inherit risk in being an entrepreneur.  The key is to view the planning process as just that…a process.

The planning process encourages the entrepreneur to step back and take an objective view of the venture.  What is gained?  Primarily, the planning process identifies the ventures potential strengths, weaknesses, opportunities, and threats.  Not only does it allow you to evaluate the venture but it clarifies the financial requirements and potential.

Some of the more common mistakes made in crafting the business plan is to make it too long.  Length matters.  Anyone reading the plan wants to make sure that the entrepreneur can clearly and concisely describe what the venture is all about, how it will reach its target market, what financing is needed, where is it coming from, what/where is the competition, what advantage does the venture offer the customer, etc.    Because entrepreneurs need to be very clear and concise about their idea/venture most collegiate business plan competitions start of as simple “elevator pitch” competitions.  One of the more common competitions held at the Collegiate Entrepreneurs Organization’s national conference each year [C-E-O.org] gives students only 90 seconds to make their pitch.  This is the amount of time you might be able to capture an executives attention with your idea!  Another common error is to assume that there is no competition for the venture.  If there is no competition then perhaps there simply isn’t a market.  The business plan is also an opportunity for the entrepreneur to confirm that they have the necessary experience, passion, and skill to properly analyze and operate the venture.  Finally, during the planning process many entrepreneurs do not make reasonable financial assumptions…which leads to erroneous expectations for the venture.  Be honest with financial figures…most times, YOU are the primary stakeholder in the venture.

Format of the Business Plan

Typically, business plans will follow a structure that describes the exact nature of the business.  This usually includes:

• Cover Page.  Include names, addresses, and phone numbers of owners.  Logically, if there is a product involved it should be pictured.  If there is any logo or service mark, it should be identified.
• Table of Contents.  The reader needs to be able to find information.  Additionally, some investors will skip to the specific information that they might be interested in so include page numbers.
• Executive Summary.  This is a concise description of the venture.  A “one-page business plan”.  If it isn’t clear, the reader will conclude that the entrepreneur isn’t exactly sure what they intend on doing.  It is also important to address what form the venture will take (S Corp, LLC, sole proprietorship, partnership, etc).  The executive summary is also an opportunity to briefly explain the ventures market, how it will operate, and what financing it will need.
• Management Plan.  This is an important section because it outlines what experience and skills the entrepreneur brings to the venture.  It identifies their credentials to run the business.  It identifies all key management teams members and what exact role they will play in the business.  The management plan must address ownership.  Who will actually own this venture?  Since a single person is not usually a great marketer, accountant, manager, logistician, financier, and inventor all rolled up into one really great super-magnificent entrepreneur…who will bring these diverse skills to the venture?
• Product/Service
  • What is the purpose of the product?
  • At what stage in development is the product?
  • What are the proprietary issues and how have they been resolved/protected?
    • Patents
    • Licenses
    • Royalties
    • Trademarks/service marks
    • Copyrights
  • Are there any product liability issues?
  • Are there any government approvals or regulations involved?
  • Are there suppliers or vendors involved?
• Marketing Plan
  • Provide an overview of the industry.
  • Describe the target market and the profile of the customer.
  • Discuss the benefits of this product/service for the customer.
  • Describe how the market will be penetrated and how the venture will price the product or service.
  • Discuss the competition.  What do they offer?   What are their strengths and weaknesses?  What are their price-points.
  • List any warranties or services associated with the venture.
  • Discuss branding, advertising, and unique labeling that will be used to market the venture.
  • Identify any industry trade associations that might provide useful trade shows or industry benchmarking that might be of use.
• Operating/Control Systems.  This section discusses the flow of orders, customers, products, etc through the venture.  In other words, what procedures will be followed to fulfill a customer’s request?  What are the steps that will be followed for billing customers and paying suppliers?  What systems are in place to control and order inventory?  How will warranties and/or returns be handled?
• Financial Plan
  • List all the assumptions being made that impact the financials.
  • Build the necessary spreadsheets to show that the entrepreneur has a grasp of income statements and balance sheets.
  • What are the cash flow projections for the venture?
• Appendix.  Here is an opportunity to include supplemental information that might be useful to the reader but would have been a distraction earlier.  The appendix will often include the entrepreneurs resume’ and the technical information to thoroughly describe the product or service being offered.

Help!

Yes, the business plan includes a lot of details that might not be handy or readily accessible by the entrepreneur.  But that is the point.  Completing a business plan ensures that the venture is well thought out.  That it…and the competition… has been analyzed properly.  It is a lot of work.  When it is done though, the entrepreneur should know that their venture is viable…or not.  The business plan can prevent financial disaster by providing the objective analysis necessary before committing a significant amount of time or treasure.  Of course there a ton of consultants around that you can pay that will do all the planning for you.  But then it isn’t your plan anymore.  They may be able to supplement your effort or help with certain sections of the plan but don’t cop-out and pay to have it all done.  A more reasonable way to get help is to work with the numerous extension offices that major public universities have.  Generally, this is a public service.  Many local communities also have business development offices that help entrepreneurs go through the business planning process and guide them to funding sources and government grants that are available.  Nationally, the U.S. Small Business Administration [SBA.gov] can be a great starting point to find help.  The SBA has a great set of tools to find help locally.  Additionally, they have business planning templates, information on franchising, buying existing businesses…and it is all FREE!  So, no excuses.  The business plan is worth the time and effort.