How to Draft a Business Plan

Part A: Introduction to Business Plans

Definition

Business plans are roadmaps for setting the direction of the company — they outline the key goals of the company and set plans for how to achieve those goals. The time horizon for business plans varies, but typically they provide plans and forecasts for the upcoming 3-5 years. Business owners can gauge performance over time by comparing actual performance with plans set out in the business plan. Moreover, business plans are often necessary to secure financing options for the business from banks or investors.

Audience

Business plans are written for a wide variety of audiences, including but not limited to:

Management team
Financing sources
Potential customers
Potential suppliers
Prospective hires
Advisors
Regulators

Quick Tips

Here are some helpful BP guidelines:

Keep the business plan short and focused
Spend a significant amount of time on the executive summary, it’s an important first impression for readers
Graphs and charts are almost always better than words
Clearly articulate your unique selling proposition by asking yourself how you plan to differentiate your products / services
Identify your niche and show that you understand your customers
Be honest about risk and discuss contingency plans and mitigation strategies
Be realistic with assumptions and projections
Look at existing business plans and get advice from trusted advisors

Part B: Contents of the Business Plan

1. Executive Summary

2. Company Description

a. Mission

b. Management Team

3. Context & Business Opportunity

a. Industry

b. Market

c. Product & Services

4. Operational Plan

5. Competition & Risks

a. Competition

b. Risk Factors & Mitigation Strategies

6. Funding Needs

a. Financial Data & Projections

b. Funds Required & Uses

7. Appendices

Executive Summary

The executive summary is often considered the most important part of the business plan because it provides a concise snapshot of the business and is the first section that readers will encounter. It should summarize the entire business plan in 1-2 pages. Therefore, it is best to write the executive summary after completing all other sections of the business plan. Also, it is useful to selectively bold the key points and data in the executive summary so that the reader does not miss any of the critical information. The essential topics to cover in the executive summary are:

Characteristics of the market and industry
Company vision and mission
Value proposition of company products / services
Overview of the operational plan
Financial projections and funding needs

Company Description

Start off with the mission statement of the business, which is essentially a statement that succinctly describes the goals and purpose of the business. An example of a mission statement for an early stage technology company is below.

Tom’s Bike Shop is a NYC bicycle shop that is addressing the need for durable, affordable, and stylish city bikes for young professionals who live in NYC and frequently use bicycles to travel around the city; through a customer-oriented culture, strong relationships with suppliers, and effective marketing tactics, Tom’s Bike Shop will capture 10% of the NYC bicycle market by 2020.

Note that the mission statement describes the market opportunity, the products / services being offered by the business, the unique value proposition of the business, and projections for business growth over the next several years.

After the mission statement, it is important to provide information on the business organization and management team, specifically:

Management team profiles - Who are the business operators / owners and what are their qualifications?
Corporate organization - What kind of legal classification of the business (e.g. LLC, sole proprietorship)?
Ownership table - What is the ownership structure of the business?
Organizational chart - What is the organizational structure of the business and how will this structure change over time?

Context & Business Opportunity

It is important to provide context and describe the market opportunity that the business is trying to address. Readers should be given information on the industry that business operates in, the market that the business is trying to address, and product / services that the business plans to produce.

For the industry description, address the following questions:

What products / services do companies in the industry produce?
How large is the industry (number of firms, total revenue, etc.)?
What kind of companies operate in the industry? What are the key common characteristics and key differences across industry players?
How has the industry changed over time? What are the current industry trends?

For the market analysis, focus on describing your potential customers:

What is the market that your business is addressing?
What are the key characteristics of potential customers in this market? What customer needs does your business intend to fulfill?
What is the size of this market? How is that size changing over time?
What are the key market trends?

When describing the product / services, it is important not only to describe the fundamental characteristics of the products / services, but also to illustrate product-market fit (i.e. how the product / services address the needs of the market):

What are the products / services that your business is offering? How will you produce and deliver these products / services?
How are these products / services differentiated from existing products / services (pricing, quality, etc.)?
How do these products / services address customer needs?
What the underlying economics behind the products / services (unit cost, price, etc.)?

Operational Plan

The structure of the operational plan varies considerably from business to business. The overall goal is to provide a detailed implementation plan for how the business will achieve the goals set out in earlier sections. This requires providing a timeline of business activities for each function of the organization, such as marketing, sales, product development, research & development, and human resources. Key questions to consider for business function are:

What activities does each function need to undertake to achieve business goals?
What is the timeline for these activities? What resources do they require?
How will the day-to-day activities of each business function be managed?

Competition & Risks

A business plan that thoughtfully considers the challenges and risks facing the business indicates that the owners / operators of the business understand both the upside and downside potential of the business. The key topics to cover are:

Who are the competitors? What are their characteristics? How much market share do they have?
How does your business differ from that of competitors?
What are the key challenges posed by competitors and how will you address them?
What are the most significant risks associated with the business and what mitigation strategies can be employed to address them?

Funding Needs

First, provide financial data and projections. Tables showing the historical financial performance for the business since its inception are great ways of illustrating historical performance; if the business is a start-up, then focus on providing realistic projections. The key financial information to include is:

Income statement — Also known as profit & loss statements, income statements provide detailed information on revenue, cost and income / profit for the business; they also indicate which business activities drive revenue and cost.
Balance sheet — The balance sheet primarily provides information on assets and liabilities; examples of line items include cash, receivables, and debt.
Cash flow statement — Business owners are often told that “cash is king,” which is to say that cash flow is a critical indicator of the financial health of a business. The cash flow statement provides information on cash inflows and cash outflows that occurred as a result of business activities.

Using this financial data and assumptions about the operations of the business, develop forecasts for each of the statements described above. The forecasts should provide a month-by-month or quarter-by-quarter projection for 2-5 years. The key financial metrics to forecast are: number of goods sold or customers serviced, market share, sales / revenue, costs of goods sold, operating costs, income / profit, net change in cash balance, debt outstanding, total assets, and total liabilities. When developing the forecasts, it is important to use reasonable assumptions (e.g. a year over year growth rate that can be justified through historical data or industry comparisons); the assumptions and supporting research can be inserted in the appendices.

Based on these forecasts, determine how much capital is needed to fund business activities. This can usually be done by determining how much cash is required during the initial few years to fund cash deficits until the business generates enough sales to finance business activities at a profit. Once you’ve arrived at the amount of funding required, develop a detailed breakdown of the uses of the funding so that potential financing providers understand how the capital will be deployed.

Appendices

This section is optional. You can add any supporting charts, data, or research here. An effective business plan writing strategy is to focus on key points in the above sections by not presenting supporting information that might distract from these points, and then place all supporting information in the appendices (note: be sure to clearly indicate in the above sections that additional information can be found in the appendices).

Examples of information to include in the appendices: