Business plans are often seen as the silver bullet to success when creating a new venture. Too often, aspiring entrepreneurs are under the misconception that a beautiful, well presented business plan is the key to attracting loads of venture capital funding and so look for a secret formula for writing a winning business plan.
In the end a business plan is only ever worthwhile if it communicates a good business idea in a realistic way.
It has been said that a business plan is out of date the minute it comes off the printer. It is true that a business plan is a dynamic document that is likely to change as you learn more about the industry and the venture, but the process of writing it does serve an important purpose in the establishment of a sustainable venture.
Writing a business plan is an opportunity for the founders of a business to discuss, debate and decide on the direction of their new venture and to communicate that so that outside parties understand the proposed venture.
Launching a new business is risky and it is a wise entrepreneur who understands how to mitigate that risk. Entrepreneurial risk can be moderated if all the people involved in launching the business agree on the business opportunity and how it should be exploited. A business plan is merely a tool to get them on the same page in this regard.
If you want to speak the language of investors and make sure you have addressed the key issues before setting out on the most daunting journey of a business person’s career, you should aim to craft a business plan that focuses on the following key issues:
1. The People.
Who are the people driving the business? What do they know? Who do they know? How well are they known?
2. The Opportunity.
Why does this industry and market pose an attractive opportunity? What is the market need? How big is the market? How quickly is the market growing? Who are the customers? Who are the suppliers? Who are the competitors? What are the substitute products? What are the barriers to entry?
3. The Business Model.
What business model will be employed to exploit this opportunity? What are the sources of revenue and timing of cash inflow? What are the drivers of costs and timing of cash outflow? What is the total investment required to make the model work? What are the critical success factors for this business model? How long will it take to break even? How long will it take to reach a positive cash flow?
4. The Strategy.
How will the business create sustainable competitive advantage? How will the company market the product or service? How will the operations of the business support the strategy?
5. The Context.
What are the key macroeconomic factors affecting the business? How do factors such as regulatory issues, interest rates, exchange rates, demographic trends and inflation affect the business?
6. Risk and Reward.
What are the key risks facing the business and what processes have been put in place to mitigate these risks? What return can shareholders expect? What could possibly go wrong in launching this business? What is the probability of negative events happening?
What processes do we have in place to mitigate such negative events? This framework does not provide the kind of “winning” formula proposed by many current how-to books and software programme for entrepreneurs. Instead it is a framework that requires the entrepreneur to systematically assess the six interdependent factors critical to every new venture by getting them to answer a series of probing questions.
The answers to these questions should be portrayed in a plan that is well laid out in a logical order, easy to read, not too long and avoids complicated technical jargon. The plan should be agreed upon and clearly understood by all the founders of the business.
It should also be reviewed by potential investors or financiers without input from any of the founders. Every traveller knows that a journey is a lot less risky when you have a map and directions; a business plan serves as a map for entrepreneurs, reducing their risk and aligning their actions.
The dos & don’ts of a useful business plan
- Get the entire management team involved in devising and discussing what should be in the business plan
- Get one person to write up the final business plan to ensure consistency and coherence
- Write up a good executive summary of no more than two pages
- Be realistic about the risks of the business
- Exceed 25 pages
- Have excessive, detailed financial projections
- Be overly optimistic – you will lose credibility
- Use technical jargon or unknown acronyms