The 3 Key Elements of a Business Plan
Small business owners need to make sure these components of their business plan are airtight to raise money and avoid crises
My involvement with small businesses over the past two decades — owning one, studying and writing about them, and conducting seminars for entrepreneurs — has made me a huge advocate of business plans (so much so that I co-wrote The Complete Idiot’s Guide to Business Plans).
The reason is simple: A business plan enables you to address on paper many of the variables that make small businesses fail. This is not to be taken lightly. Since lenders and investors are holding their purse strings tight these days, an inadequate business plan could keep you from getting the financing you need.
It’s best to complete your business plan before you devote much time and money to your new business, and then revisit it as your enterprise grows, adjusting it as necessary. And be sure the plan realistically identifies opportunities and obstacles, with a strong focus on the latter.
Below are three areas of a business plan that need special attention. Handling them wisely will strengthen your business from the outset and uncover issues that could cause problems down the road.
The Management Team
“One of my mentors used to tell his business school classes there are three things we invest in: Team, team and team,” says Eric Chin, general partner at Crosslink Capital in San Francisco, an investor in early-stage businesses. A strong management team with a mediocre idea is more attractive to many investors than a weak management team with a great idea.
When writing your business plan, dissect your previous experience as if you were the investor. If you have partners, outline which areas of responsibility each of you will undertake as well as the experience that each of you brings to the venture.
In doing this, you’ll uncover any weaknesses in yourself or your management team. Perhaps you have no technology experience or have never overseen marketing. Such gaps reveal where you’ll need to enlist help, either by allocating dollars or by finding another business partner.
Most of the reasons businesses fail are financial, according to the Small Business Administration). They include, for example, lack of capital; overinvestment in fixed assets, like office space and equipment; poor credit terms, like cash-on-demand for orders and steep interest rates on credit lines; and poor management of business funds. If you have a complete set of financial statements and projections, your business plan can identify all of these potential trouble spots before you launch.
At a minimum, your business plan should have best- and worst-case scenarios in four key areas:
Operating budget. List your business’s day-to-day operating expenses — rent, salaries, supplies, insurance, telephone, Internet and the like — and the income that you’ll need to offset them. If the expenses are too high, you’ll see that right away and can work on reducing overhead.
I recommend using BizStats, a free online tool that helps you compare your business’s expense ratios with those of others in your industry.
Cash-flow statement (projected). This identifies your business’s sources of income and when they’ll arrive. For example, you may have revenue from a big quarterly order as well as a steady stream of income from monthly sales. Identifying dry cash-flow periods will let you allocate additional resources to those slow times, avoiding cash crunches that can make it hard to pay your bills.
Profit-and-loss statement (projected). Cash flow is different from profitability (the amount of money left after subtracting expenses from revenue). Your business can be profitable, but have poor cash flow. It’s also possible to have decent cash flow and not be profitable, especially if you’re running your business from savings or a line of credit. Both situations are deadly.
Use your business plan to understand where the money is coming from and how much it’s really costing you to run your business. Of course, different businesses have different timelines for breaking even and, ultimately, becoming profitable. Be sure that the cash on hand to start your business, plus incremental revenue increases, will sustain you until your venture begins breaking even.
Sales projections. Where will your sales be in six months? A year from now? Realistic projections will help you identify how much you’ll need to reinvest in your business to meet expenses as more supplies, equipment and employees become necessary to support its growth.
Trade associations and regional Small Business Development Centers (SBA resources that help entrepreneurs with everything from market strategy to basic research) can help you determine sales metrics for your area and industry.
The Executive Summary
It may seem counterintuitive, but the executive summary of your business plan should be the last part of the document that you write — even though it will appear as the first two to five pages summarizing the entire plan and distilling your company’s strengths.
If you have trouble articulating your business’s purpose, strengths, challenges and goals clearly in a few pages, this is a sign that you might not be clear about your business vision or market strategy.
It’s a good idea to share your executive summary with someone objective, like your accountant or a business mentor. That way, you'll be sure it's fully understandable and sensible when you show it to a potential lender or investor.