This article was written by John Rau, SCORE Orange County Business Mentor
A business plan is your “roadmap to the future”. There are many templates available in public libraries, text books and on the Web, including a basic template provided by SCORE at www.score.org; however, preparing and writing your business plan is more than merely obtaining one of these templates, filling in the blanks and now “you have one”. You’ve got to do your homework and address the specifics of what you intend to do with your business. Relative to these business plan templates, some provide more details than others, but all follow a similar outline in terms of topics to be covered. In this regard, a general overview of the topics to be addressed and illustrative examples of typical common mistakes made are as follows:
General Topics: Brief overview of the total business plan, citing the important and noteworthy elements of your business plan, and generally written after the other sections are completed. This is the “eye catcher” section to get the attention of potential investors so that they will want to read more about your planned business venture and perhaps invest in it.
- Too many pages and too much detail regarding what is further discussed in the plan. Typically no more than one to two pages, three pages max. Beyond this number of pages, you lose the concept of what is a “summary”.
- Not providing a “clear focus” as to what your business opportunity is all about. Make it “short and sweet”.
General Topics: This is your company overview section that describes who you are and what you plan to do. Present you mission statement followed by company goals and objectives and business philosophy. Describe your industry, your target market and where you plan to fit in. Describe the legal form of ownership you will choose. If your company has any history, mention it here.
- Goals and objectives are too detailed and not readily measurable. Keep them simple and achievable. You will want to create metrics to be able to track your performance.
- Lack of a clear business idea or a poorly defined business concept.
- Not providing a clear and convincing argument that your selected market area has the potential for growth so as to ensure, in the long run, that you can be successful. You need the “why you” story relative to other business entities already in the same marketplace.
General Topics: Analysis of the target market (total size, current demand, growth history and potential, any barriers to entry, sales trends, statistics, etc.) and a profile of your target customers (demographics, etc.). Describe the industry structure and how you would fit in. Do you have a niche? If so, describe it. Describe the potential competition. (Note: Never assume there isn’t any!)
- Don’t just list similar businesses in your target market area and leave it at that. If these are potential competitors, then describe what’s “competitive” about them. Point out what is “different” about you, that is, what is your competitive advantage, if any, and potential discriminators.
- Target market is poorly defined. Be very specific in your definition of your customer(s). Is the consumer need really there? Don’t use the “field of dreams” approach, that is, “If I build it, they will come.”
- It’s not enough to say “there is a big market” without backing it up with facts.
- Not providing a clear understanding of the industry that you are in and how it functions.
Company Organization and Management
General Topics: Describe how you are organized and how you plan to manage the organization. Identify key personnel, what roles they will play in the management of the organization and what are their relevant credentials/background.
- Selecting for key personnel friends or relatives with no business experience relative to the roles they will play and/or responsibilities they will have. Investors will generally not invest in companies that don’t have the “management credentials” to ensure that the company can be properly managed and that the investors can be assured that they will get their money back with a reasonable rate of return in a relatively short period of time.
- If you plan to “grow” your organization in the sense of starting small with a few key management positions filled initially, then you need to present a time-phased plan showing how you will subsequently fill the remaining positions.
Service or Product Line
General Topics: Describe what product(s) or service(s) your company will provide. What are the most important features, advantages and benefits to the consumers? Are they brand new or never been seen before, if so, then describe why this might be a “discriminator” in the marketplace. Describe any intellectual property considerations such as use of patents and copyrights. If there are any competitive advantages or “elements of uniqueness”, then identify them. Relative to products, if there are any development efforts required, then you need to describe where you are in the development process and what is needed (resources and time) to get your products “consumer ready”. If there are any applicable regulatory issues relative to your products (such as government approval), describe them here.
- Describing the product(s) and/ or services with too much technical information and using too many industry specific words or phrases and special acronyms. Put spec sheets, laboratory test results, etc. in the appendices.
- If new development and/or technology advancements are required, failure to adequately address risks involved that could affect overall quality and performance.
- If regulatory approval is required, such as with medical products, failure to address the impacts of regulatory delays on product development timelines and introduction into the marketplace. Remember these types of delays could also impact your cash flow.
General Topics: Describe your start up requirements in the sense of what you will need to get your business off the ground. Describe the daily operation of the business in the sense of how the product(s) and/or the service(s) will be provided. Provide a description of your operating facilities—geographical location, building size and space, equipment necessary, etc. If you have a facilities plan and a listing of capital improvements needed, describe it here. Likewise, if you have a staffing plan in terms of number of employees and corresponding job descriptions, then describe this here also. This information may have already been provided at the “top level” in the Company and Organization and Management section above, but here you should go into detail as to how the business will function on a daily basis. If applicable, describe any manufacturing processes involved and how you will conduct these types of activities. If there are any potential risks to successful implementation of your plans, here is where you should identify them and discuss your plans for mitigation.
- Not addressing obvious risks. Bankers and investors want to know the downside risks, if any, associated with how you plan to run your business.
- Not providing a clear and convincing story that “you know how to get there” in the sense that you have defined what your business is all about, but you haven’t convinced the reader that you have a master plan and know what needs to be done to get you there.
Marketing and Sales Plan
General Topics: Describe your basic marketing and sales strategy in terms of how you plan to make consumers aware of your product(s) and/ or services(s) and the specific approach(es) (such as pricing strategy, advertising, promotional efforts, distribution channels, use of e-commerce, social media, etc.) you plan to implement to get them to buy what you are offering.
- Your marketing and sales plan/strategy does not correlate with your sales projections. For example, you show millions of dollars worth of sales when you haven’t even marketed your product(s) and/or service(s). Remember it takes time to implement a sales and marketing strategy before you can expect to see results. Success doesn’t “happen overnight”! You need to show a time-phased approach with a master schedule and associated timelines.
- Too much time spent describing your products in full detail rather than describing the marketplace and who will buy them and why will they buy them.
- Lacking clarity about how future changes might affect your market and how you would respond to these changes.
General Topics: Describe your funding strategy, if applicable, in terms of equity funding and debt funding as well as how this will be repaid. Provide a discussion of all sources and uses of funds including any loans or grants. Mention your planned exit strategy, if you have one.
- Lack of financial investment on the part of the founders. If the founders aren’t willing to invest in the company, then is the company really viable?
- Offering a lower percentage of ownership than the investment requirement demands. Not clear what the percentage distribution of ownership is and how that is derived.
- Offering a return on investment that is out of line with your industry.
- Unclear company valuation and exit strategy. Failure to point out how investors will get their money out.
General Topics: This is your cash flow projection section where you present projections of revenues, costs and profits for at least the first 12 months of operation and generally quarterly for the next 3-5 years. Include balance sheets and capital expenditure estimates. An explanation of projections in terms of assumptions is important.
1. Failure to review your numbers and projections with an accountant or other experts who are familiar with your type of business or industry to check the credibility of your estimates.
2. Using “standard percentage templates” found on the Internet or in textbooks to create your annual projections of costs. You must use what is specifically relevant to your type of business or industry.
3. Making unsubstantiated “wild ass guesses (WAGs)” without any backup and lack of financial assumptions to explain where the numbers originated.
4. Showing you will make millions of dollars the first year and many millions more each year thereafter. Keep in mind that most startup businesses generally don’t make money in the first year or two and potential investors know this. You lose credibility with unrealistic financial forecasts.
5. Stating that you will capture a certain percentage of the overall market for your product(s) or service(s) without fully explaining how you intend to do that.
6. Not making it clear as to how you’re going to make money. Spending too much time describing what you do and not enough time on “how you will sell to whom”, what you will charge and how much profit you will make.
7. Underestimating expenses and not budgeting for unexpected costs.
General Topics: Here is where you can provide backup information relative to the basic sections described above. Examples would include detailed resumes of key personnel, additional financial analyses, preliminary marketing materials, web site description, competing products/services literature, etc. Use this section sparingly as you don’t want to dramatically increase the size of your business plan.
In general, use a business plan template to get you started in the sense of getting the information needed into the right sections. Once you have “completed the template” to obtain a “first cut” at your business plan, then use the illustrative “business plan mistakes” cited above to make sure you haven’t made any of these common and frequent mistakes. Good advice is to have a third party (such as tech writers, SCORE counselors, etc.) review what you have written to check for clarity and completeness. You need a smooth flowing narrative free of grammar, spelling and punctuation mistakes. It shouldn’t read like the writer never passed English 1A and 1B in school. Furthermore, don’t use too many superlatives as that will turn off most investors and readers, and when unsubstantiated, hurts your credibility.
In summary, as pointed out numerous times in the literature, the quality of your business plan depends on the quality of the underlying business concept and your business plan should be believable, accurate, comprehensive and enthusiastic. As a general rule, your business plan should not exceed 15-25 pages, excluding appendices. Remember you are not writing a novel!