On a similar note...
On a similar note...
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.
A business plan can make or break a small business. A strong, detailed plan provides a clear road map for the future, forces you to think through the validity of a business idea, and can give you much greater understanding of your business’s financials and the competition.
A business plan typically looks out over three to five years, detailing all of your goals and how you plan to achieve them. If you're applying for a loan or looking for investors, a business plan shows you’re prepared and have fully vetted your business idea, says Craig Allen, a financial advisor who teaches business plan writing classes at Southern New Hampshire University.
“If you have no financial forecast, which is part of the business plan, it’s very difficult to show the bank how you are going to repay the loan,” Allen says.
1. Executive summary
This is the first page of your business plan. It should include a mission statement, which explains the main focus of your business, as well as a brief description of the products or services offered, basic information such as ownership structure, and a summary of your plans.
2. Company description
This section provides a snapshot of your small business. It contains important information including its registered name, address of any physical locations, names of key people in the business, history of the company, nature of the business and more details about products or services that it offers or will offer.
3. Objective statement or business goals
An objective statement should clearly define your company’s goals and contain a business strategy that details how you plan to achieve them. It spells out exactly what you’d like to accomplish, both in the near term and over the long term.
If you’re looking for outside funding, you can use this section to explain why you have a clear need for the funds, how the financing will help your business grow, and how you plan to achieve your growth targets. The key is to provide a clear explanation of the opportunity presented and how the loan or investment will grow your company.
For example, if your business is launching a second product line, you might explain how the loan will help your company launch the new product and increase its sales by 50% over the next three years.
» MORE: Best loans for working capital
4. Business and management structure
Here, you’ll list your business’s legal structure — such as a sole proprietorship, partnership or corporation — as well as key employees, managers or other owners of the business. It should also include the percent ownership that each owner has and the extent of each owner’s involvement in the company.
5. Products and services
In this section, you can detail the products or services you offer or plan to offer. It should include the following:
An explanation of how your product or service works
The pricing model for your product or service
The typical customers you serve
Your sales and distribution strategy
Why your product or service is better than what the competition is offering
How you plan to fill orders
You can also discuss current or pending trademarks and patents associated with your product or service.
6. Marketing and sales plan
This is simply an explanation of what your marketing strategy is and how you will execute it. Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business. This section can also highlight the strengths of your business and focus on what sets your business apart from your competition.
7. Business financial analysis
If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business seeking small-business loans, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.
You may also include ratios that highlight the financial health of your business, such as:
Net profit margin: the percentage of revenue you keep as net income
Current ratio: the measurement of your liquidity and ability to repay debts
Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year
8. Financial projections
This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.
Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan. Accuracy is key, so carefully analyze your past financial statements before giving projections.
Your goals may be aggressive, but they should also be realistic. “It’s OK to be optimistic if you can justify it,” Allen says. “In general, you don’t want to stand out in a negative way by being too optimistic.”
You want to show that your business can generate strong enough cash flow to cover the regular debt payments on a loan. But you should also address the various risk factors of the business, Allen says.
“The loan officer is definitely going to want to know that you’ve thought through all of the potential risks and that you’ve mitigated those risks in some way,” he says.
List any supporting information or other additional information that you couldn’t fit in elsewhere, such as resumes of key employees, licenses, equipment leases, permits, patents, receipts, bank statements, contracts, and personal and business credit history. If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.
Business plan tips and resources
Now that you’ve written your business plan, here are some tips to help your hard work stand out:
Avoid over-optimism: If you’re applying for a business loan at a local bank, the loan officer likely knows your market pretty well. Providing unreasonable sales estimates can hurt your chances of loan approval.
“They know what you can expect sales to be for that type of business in that market,” Allen says. “If you walk in with a sales forecast 50% higher than other businesses, they are going to know that you are not being realistic, and that’s going to work against you.”
Keep it concise: All you need is 15 to 25 pages for a good business plan, as long as the plan is clear, concise and contains all of the relevant information, Allen says.
Focus on the key elements of your business plan and avoid getting too bogged down by the technical aspects of your business or using too much industry jargon. You can always put supporting information or other important details in the appendix.
Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors, taking their mind off your business and putting it on the mistakes you made. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.
“I always feel like if the person can’t even bother to proofread something that they wrote, how detail-oriented is this person in running their business?” Allen says.
Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. You can search for a mentor or find a local SCORE chapter for more guidance.
The U.S. Small Business Administration’s Small Business Development Centers, which provide free business consulting and help with business plan development, can also be a resource.