If you’re starting a business, one thing
you’ll need to do early on is to write a business plan.
But it can be hard to know where to start. You can find plenty of business plan templates online, but filling them out can still be tough. What information should you include? How much detail should you go into? What are the essential ingredients for a successful business plan?
In this tutorial, I’ll answer all those questions for you. I’ll take you through what a business plan is and why you should write one, and then we’ll look in detail at each of the sections of a business plan.
Whether you’re working from a template or staring at a blank sheet of paper, by the end of this tutorial you’ll know exactly how to proceed and will feel confident in your ability to create an effective business plan.
1. What Is a Business Plan?
Let’s start with the basics and settle on a basic definition of a business plan.
The U.S. Small Business Administration gives a pretty good description:
A business plan is an essential roadmap for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.
Notice that the definition doesn’t include anything about the format of the business plan, the length, the detailed contents, or the intended audience. All of those things can vary widely, so although we’ll look at some common approaches in this tutorial, there’s always scope for you to do it differently.
The important thing is that you create a “roadmap for business success”, looking into the future and planning how your company will grow.
Also notice that it’s a “living document”, so don’t feel pressured into thinking that you need to have all the answers right now. It’s designed to grow and change with your business, so this is not a single, perfect document, but the first draft of many. I’ll cover updating your business plan in the final section.
2. Why Write a Business Plan?
You may be reading this tutorial because you’ve been told to create a business plan. If you’re trying to raise funds for your business or to attract investors, a business plan is often a requirement.
A bank, for example, won’t want to lend you money without first getting a detailed understanding of how your business works, how it fits into the competitive landscape, and how you plan to generate the profits that will enable you to pay that money back in future.
The same goes for angel investors, venture capitalists, or other people who may be thinking of investing in your business.
So a business plan is often a key component of a package you put together when you’re seeking funding. For more on this process, see the following tutorials:
- FinanceHow to Craft a VC-Ready Pitch DeckEddie Earnest
- FinanceBorrowing Money to Fund a BusinessAndrew Blackman
- FinanceHow Angel Investors Can Fund Your BusinessAndrew Blackman
- FinanceHow to Raise Money From Venture CapitalistsAndrew Blackman
But that’s not the only reason to write a
business plan. Even if there’s no external requirement to write one, it’s still
an essential component of starting a company with solid foundations.
In a recent tutorial, I went through a comprehensive, step-by-step guide to starting a business, and writing a business plan came early on, as step 3. To me, it just makes sense.
As Benjamin Franklin said:
“If you fail to plan, you are planning to fail.”
Making a plan is a basic step that you should take before any major activity. Writing a business plan may be a painful process, but it forces you to think through your strategy and get clear about key things like your value proposition, your target customers, your financial plan, and so on. Better to struggle with those things now than to have your business suffer from lack of clarity.
You’ll find some articles suggesting that business plans are outdated, particularly in today’s fast-moving, ever-changing world. But remember the SBA’s definition of a business plan as a “roadmap for success”. Having a map doesn’t commit you to following one particular route. In your business journey, you’ll probably end up getting diverted, taking shortcuts, trying to dodge traffic, and maybe even making the odd U-turn. In a world of change, having a map becomes even more important.
So be ready to change your business plan as you go, and certainly don’t feel constrained by it. But having a plan, even a provisional one, will help you to make sure that your business idea makes sense, that you have thought through all the problems you could face, and that you are ready to make the significant investment of time and money that a business entails.
Bottom line: You plan your vacation, so you should definitely plan something as important as your business.
3. What Makes a Good Business Plan?
So what makes for an effective business plan? It depends on your audience: whether you’re writing it for yourself, or for potential investors, lenders or business partners.
If you’re writing a plan to convince people to lend money or invest in your business, then your plan will need to accomplish a few things:
- Have a compelling executive summary that clearly explains your business idea and gets people hooked on its potential.
- Include enough detail to enable the reader to understand your products/services and what makes them special.
- Show what’s different about your company and what advantage it has over competitors.
- Demonstrate a clear strategy for winning new customers and increasing revenue each year.
- Include a solid financial plan with realistic growth projections.
For an external audience, presentation is also very important. You’ll be judged primarily on the content, of course, but we’re all affected by how something looks, aren’t we? If you visit a website and it has an amateurish, 1990s design, you’re less likely to click around than you are when you find a polished, attractive site.
It’s just the same with business plans. Focus on the content, but don’t neglect the design. If you use a professional-looking business plan template, you create a positive first impression, help your reader to find the crucial information quickly, and make reading your plan a pleasant experience.
There’s no prescribed length for a business
plan—it depends on how complex your business is and how much detail you need to
go into. As a general guide, if you aim for 15 to 20 pages you’ll be on the right
track. But if you’ve communicated all the important points in five pages,
please don’t feel any need to pad it out; conversely, if you need more space,
that’s fine too.
If you’re writing a business plan for your own benefit, then of course the format is less important. It’s more about capturing the essential information you need to understand your business and how it will grow.
As we’ll discover later, a good business plan is a living document anyway, so you can (and should) go back to it later and enhance it. So it may start on a napkin or in a simple Word document, and then evolve from there later on.
Most of the points I described above still apply for an internal business plan. It’s just that the purpose changes; it’s not about convincing other people that your business has a bright future, but about getting clear for yourself on what that future looks like and how you’ll get there.
So it’s still good practice to include an executive summary, for example. You may think you don’t need one, but you’ll find that the exercise of boiling your business idea down to a brief “elevator pitch” gives you much greater clarity. It will also help you talk about your business and promote it when you come across networking opportunities.
Likewise, you’ll still want to describe your products/services, your competitive advantage, and your strategy for winning new customers. And a solid financial plan showing how you plan to grow is an absolute must.
In the following section, I’ll go through the key components of a business plan. These sections are important to include if you’re creating a formal plan for an external audience, but if you’re writing it just for yourself, you have some more flexibility.
I’d still recommend going through all of them and including them in some form, but you can adapt the document to your own needs. As long as you answer the most important questions, like what’s unique about your business and how it will attract customers, you can follow whichever format makes the most sense for your company.
For more on creating flexible business plans like this, see the following tutorials:
- EntrepreneurshipA Fluid Business Plan Template for Your MicrobusinessSkellie
- BusinessBusiness Plans for Freelance ConsultantsWill Kenny
4. Key Components of a Business Plan
So we’ve looked at why you should write a business plan and what makes a good business plan. Now it’s time to get more specific about the contents.
So now I’ll list the main sections you should include, and tell you how to approach each section. These are the seven sections recommended by the National Federation of Independent Business, but you’ll also find other sources, such as the U.S. Small Business Administration, making very similar suggestions.
Of course, you can vary this depending on your own situation. For example, if you’re running a tech firm and presenting your plan to a technically-literate audience, you may want to include a section providing more detail on the technology and how it works. But the following general guide will work for most businesses.
If you’re looking for funding, this could be the only section that potential lenders or investors read. If this section convinces them that your company has potential, they’ll read more; if not, your beautifully printed plan with all its glossy charts and images is destined for the recycle bin.
By the way, I’m listing the Executive Summary first because it appears at the beginning of the document, but you may want to write it after completing the rest of the plan, or at least come back to it then and modify it. As you’ll see, a lot of the content draws from what you’ve written in other sections of the plan.
Your executive summary should start with an ultra-short description of your company. In a single sentence, or at most a short paragraph, describe what you do and why you do it. Keep it simple, and avoid jargon.
This can be a surprisingly difficult thing to do. As an entrepreneur you’re probably full of enthusiasm about all the different things your company does, and condensing it all into a single sentence is tricky.
Here’s a useful trick: go to a search engine and type in the names of some of your favourite companies. Then look at the snippet of text that appears underneath the company’s name in the search results. It serves a slightly different purpose, but it can be a good, quick way to see how companies self-identify in a very limited space.
If you go to Google.com and search for “Apple”, for example, the text snippet is:
Apple leads the world in innovation with iPhone, iPad, Mac, Apple Watch, iOS, OS X, watchOS and more.
For Envato, the company that runs this site, the text is:
Envato is an ecosystem of sites that help people be creative.
After you’ve crafted a good, pithy description, the rest of the executive summary should be dedicated to summarizing what you cover in the rest of the document. So you’ll want to go through the rest of the sections and pull out the highlights.
And I mean the real highlights—aim to keep this section to a single page. Remember that the purpose of the executive summary is to get people hooked on your company and convince them to read more. Don’t include details—they’ll find those later on.
Be specific, by all means, about the big-picture things like the problem you solve, the strategy you follow, your target customers and your top-level financial information. But keep strictly to the big picture, and leave everything else for later.
If you’re writing the plan for a particular purpose, for example to secure funding, then you should also use the executive summary to tell people exactly what you want from them and why.
This section is a high-level overview of your company.
Wait, didn’t we just do that in the executive summary? Yes, but this section is a little different. The executive summary was like an initial elevator pitch for your company. The company description gives information that is useful to your reader, but doesn’t fall into the “attention-grabbing” category.
For example, this section often gives a brief history of the company—when it was founded, where it’s located, and some of the major milestones it’s reached so far. This wouldn’t be appropriate for the executive summary, because it’s not going to convince anyone to read further. But it is something that an investor or lender would want to know about once they’ve decided to read on.
Similarly, you should mention the legal structure of your business—whether you’re a sole proprietor, a limited partnership, a corporation, or another form. For more on this, see the following tutorial:
If your business has shops, offices or
other physical locations, mention those here too. And you can also give more
information on your products/services,
who your customers are, and what your goals are for attracting more customers
Remember that some of this information will appear in the following sections, so don’t go into too much detail or duplicate too much information—it’s fine to keep this section quite short.
No matter what kind of business you run, the bottom line is that you’re selling something. This section is designed to give a clear description of exactly what you’re selling.
It’s a good idea to approach this, however, from the point of view of a potential customer, rather than from your own point of view as the producer. You may have packed all sorts of cool features into your product, but what matters is how those features help your customers solve a problem or have a great experience.
For example, if you run a software company and your main product is a fitness app, don’t just list the features of the app or the code you used to build it. Instead, pinpoint how your app is different from the hundreds of other fitness apps on the market. What new approach does it take? How will it improve the lives of the people who buy it? What problem does it solve in a way your competitors don’t?
Whether you’re selling products, services, or a mix of both, the same rule applies. Try to step outside your company and see what matters to your customers. That, ultimately, is what any investors or lenders will care about—and it’s what you should care about too. Customers are the lifeblood of your business.
So if the company you run is a design studio, think about how it’s different from all the others. Maybe you serve a particular niche market, maybe you and your staff bring a unique set of skills, or maybe you offer a broader range of add-on services.
Also think about where your product fits in the product lifecycle. This is not a new concept, as you can see from this 1965 Harvard Business Review article, but it’s remained remarkably unchanged as other business fads have come and gone. Here are the four stages that products go through:
- Market development
For some products, like hi-tech gadgets, that lifecycle can be very fast; for more traditional products, it can be much slower. Describe what stage your product is in and how long you expect it to take to progress through the various stages.
And that leads on naturally to the next question: When your current main product goes through its natural lifecycle into decline and ultimately death, what else have you got in the pipeline? Or what research are you doing to come up with those follow-up products?
If you’re stuck for ideas, try this tutorial:
One final thing: If
you hold any patents or other intellectual property, you should also mention
them in this section.
Now that you’ve described what you’re selling, you need to focus on who you’re selling it to.
The idea of the market analysis is to describe your customers. Who are they, how many of them are there, and how many can you expect to get?
That starts with the big picture: what industry are you in, how big is that industry, and how fast is it growing?
Then define your target market: a smaller segment of the overall customer base within your industry, to whom you plan to sell your products or services.
You’ll need to do some market research for this section, if you haven’t already. Try to get figures on how much money your target market spends on your kinds of products and services. Run surveys to find out what they’re looking for and whether your competitors’ offerings are meeting their needs.
There’s a lot to do here, so for more detail, see these tutorials:
- EntrepreneurshipHow to Get to Know Your CustomersDavid Masters
- FreelanceHow to Identify Profitable Clients: A Step-by-Step GuideCeline Roque
- FreelanceHow to Find Out Exactly What Your Target Clients Want—Then Sell It to ThemCeline Roque
- Business PlansHow To Put 'The Business Model Canvas' To Good UseSven Lenaerts
Then think about how much market share you
can expect to gain. This involves a lot of estimating, so be clear about the
assumptions you’re using and their justification.
Also describe your pricing strategy, and how you fit into the competitive landscape. No matter how good your products or services are, it’s likely that your competitors will have at least some advantages over you, so be honest about those. List your strengths and weaknesses, any problems you face, and how you will overcome them.
Strategy and Implementation
So we now know what you’re selling and who you’re selling it to. The next step is to define how you’re going to build your products, and how you’re going to reach all those potential clients.
In other words, what’s your strategy for sales, marketing and operations?
For example, do you have a dedicated sales force, or do you plan to hire one? How will you identify prospects, and how will you approach them?
What’s your marketing plan? How do you plan to position your products or services to convince people to buy them? How will you advertise? Do you plan to use social media as a marketing channel? If so, how?
This is another huge area, but fortunately we have dozens of tutorials in our Marketing category to help you, such as:
- MarketingThe No-Nonsense Guide to Marketing Your MicrobusinessSkellie
- BootstrappingA Brief Introduction to Bootstrapping Your MarketingDavid Masters
- MarketingHow to Systematize Your Online MarketingDavid Masters
- Email MarketingHow to Create an Email Marketing PlanDavid Masters
- MarketingPreparing Your Online Business For MarketingOmar Zenhom
- MarketingPlan Multi-Content Marketing for Your New Online BusinessOmar Zenhom
- MarketingBuild Audience Share for Your New Online BusinessOmar Zenhom
For the operations
side, you don’t need to go into a huge amount of detail on the
behind-the-scenes workings of your business. Just give an overview of how
you’ll operate the business.
For products, this could be a description of where you acquire supplies, how you build the products, and how you distribute or deliver them. For services, you could describe the process of delivering that service, from client acquisition through to project definition, delivery and completion.
Organization and Management Team
This section is just what it sounds like. Describe your company's organizational structure. Who owns it, who manages it, and who are the key employees?
A simple organization chart is useful here. But the most important thing is not really the names of the departments or the people in charge. What matters is who those people are. What skills and experience do they bring to the company?
That, after all, is a key factor in the success of any business. Having the right people will help you navigate the difficult road ahead. So take the time to profile each of your key employees. Even if there aren’t many of them—or even if it’s just you—it’s important to show that your team is qualified and competent. Focus particularly on experience that’s relevant to the company, rather than just general background.
Financial Plan and Projections
This final section gets down to the dollars and cents. (Or insert the currency of your choice here!)
If you’re already in business, how much money have you been making, and how do you expect that to change? If it’s a new business, what are your forecasts for the next few years?
The information here needs to be quite detailed. For the historical part, you’ll need to produce income statements, balance sheets and cash flow statements year by year for the past five years (or however long you’ve been in business).
For the projections, you’ll need to produce the same statements based on your estimates for the next three years. You’ll also need to justify those estimates by showing what they’re based on. Feel free to use an appendix if it’s a lot of information.
You may need to hire an accountant to help you prepare these statements, especially if the financial stuff doesn’t come easily to you. But if you want to do it yourself, the following tutorials will help you:
- PlanningFrom Idea to Break-Even: How to Create a Financial Model for Your BusinessAndrew Blackman
- AccountingBookkeeping 101: What You Need to Know to Run Your BusinessAndrew Blackman
- FinanceHow To Read an Income StatementAndrew Blackman
- FinanceHow To Read a Balance SheetAndrew Blackman
- FinanceHow To Read a Cash Flow StatementAndrew Blackman
5. How to Use Your Business Plan
Whether you’ve created your business plan for an external audience or for your own purposes, it’s important that you remember what we established right at the beginning: it’s a living document.
So even if you created it to apply for a particular type of funding, don’t just discard it after your application has been accepted or rejected. You’ve taken the time to create a comprehensive strategic view of your business, so why not put it to good use?
Your business plan can be central to your goal-setting and decision-making within the company for years to come. So update it regularly, using whatever schedule makes most sense, but at a minimum every year.
Your goals will change, and so will your strategies and probably your products and services too, and that’s OK. It’s the nature of being in business. Nothing stays the same for very long.
As you’ve seen in this tutorial, a business plan is an essential document for any company. A well-written plan can give you new insights and clarity on your business strategy—and if you’re applying for loans or investment, it can help you secure the funds that will fuel your growth.
You now know exactly what’s involved in writing an effective business plan. You’ve seen the purpose of the plan and how it can be used, and we’ve gone through the key components, section by section, explaining how you should approach each one and what you should include.
Some of the sections, such as analyzing your target market and coming up with a sales and marketing strategy, require quite a bit of extra research. If you haven’t already done that work, I’d suggest that you follow some of the links I included in those sections, so that you can get more information on how to gather the necessary data.
Finally, if you want to see how the business plan fits into the bigger picture of launching your new company, have a look at my recent tutorial on How to Start a Business.