An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.
It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.
But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.
Step 1: Research
The business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.
Your research should include:
- Understanding the dynamics and forces affecting the industry
- The preferences and characteristics of your target market
- Insight into how many competitors are already operating and the quality of their product or service
- Finding out who you could partner with to start the business
- How your product or service will be created and delivered
- How it is different from those that already exist, and identifying a profit and operating model for the business.
Some of the sources you can turn to for this information include:
- The Internet
- Industry experts and associations
- Suppliers who play a key role in the industry
- Existing competitors in the industry
- Interaction with member of your team.
Step 2: Stress-test your business concept
Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.
An idea should be stress-tested before producing and selling it.
- Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
- Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
- Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
- Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.
Step 3: Refine your business concept
Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.
The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.
Step 4: Writing the business plan
While a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.
While there is no universal business plan template, plans generally include the following sections:
1. Table of Contents
This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.
2. Executive Summary
The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.
It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.
The executive summary is written last and should not exceed two pages in length.
3. General Company Description
This is where you give an overview of the company and the business it engages in.
It should include the company’s name, mission statement, goals and objectives, and strengths.
If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.
4. The Opportunity Industry & Market
Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.
When writing about the industry you must answer questions about:
- The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
- Who the customers are and the influence they have over prices
- Who the suppliers are and their influence over the prices
- Who the competitors are and how strong their products or services are and the major changes affecting the industry.
Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.
5. Business Model
The business model you choose will be a strong determining point of the future the success of your business.
Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.
You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.
Discuss how your business will compete in its specific market.
You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.
You must also include your plan for how you intend to enter the market and grow your market-share.
7. Team: Management & Organisation
You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.
8. Marketing Plan
This should provide details on your marketing strategy based on your market research.
The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.
9. Operational Plan
An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.
10. Financial Plan
The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.
The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.
This section contains any supporting documentation you think the reader would want to refer to and could include:
- Brochures and advertising
- Industry studies
- Blueprints and plans
- Maps and photos of locations
- Lists of equipment
- Letters of support from future customers
- Market research studies
- Detailed financial calculations and projections.
While writing the business plan it helps to be cognisant of the following:
- Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
- If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
- Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
- Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.
- If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
- There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
- If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
- One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
- Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.