For now, we’ll ignore obvious components such as the cover page and table of contents, though needless to say, your cover page should be simple yet attractive, and your table of contents should be easy to navigate.
Of course, you should definitely have a legal page up front in the plan too, and have all copies in circulation signed by readers. This protects you from at least the possibility of someone running away with your business concept and plan! But we won’t spend much time here on legalities, which is better left to the legal experts.
A typical business plan should cover between 3 – 5 years. It’s not recommended to create a plan beyond that, since so many factors in the future are hard to predict and the entire environment surrounding your business will change considerably. Instead, create a long-term vision, and build successive business plans towards that vision every 3 – 5 years.
Now, let’s move on to the components that make up a business plan…
There are seven business plan components you absolutely must include in your plan. Rather than getting into deep detail about each of these (which would probably take you a week to read), we’ll focus on the their essence, and what they mean to your business plan.
Now let’s get down to business!
Below is a list of the key business plan components, with explanations of each further below:
- Executive Summary – the core of your business plan
- Company Summary
- Market Analysis
- Marketing and Sales Plan
- Management Plan
- Financial Plan
- Appendix to stick in the detailed financials
The Executive Summary: The Core of Your Business Plan
It’s important to keep in mind that most people just don’t like to read.
The first and definitely most important of all business plan components is the Executive Summary. In fact, the executive summary will most likely make or break your plan.
Most potential investors and lenders, like most people in general, would rather get a clear picture within the first few minutes than have to read all 50 pages of your plan.
But the paradox of the executive summary is that while you’d ideally want to let your audience know as much as you can about your business proposal, in reality, this doesn’t make sense. The whole idea of the executive summary is to give the reader a snapshot of your business concept, and to win their interest to read on.
The executive summary, while being the most important business plan component, is also the most difficult to write. To learn how to write an executive summary in more depth than what we’ll cover here, you can read writing an executive summary.
But for now, let’s just take a look at what goes into the executive summary:
- Highlights: 3 to 5 year projections for sales, gross margin and profit. These projections give the reader a summary view of key figures from the financial section of your plan.
- Objectives: State your business (not personal) objectives in specific, measurable, actionable, realistic and time limited (SMART) terms. If you can’t measure your goals, then how do you know you’re achieving them? Your objectives should state a timeline for when they will be achieved, and as such, should be written with a future focus.
- Mission: Your mission should define your business and its fundamental goals. Think of your mission as a description of your business in the now, rather than in the future, and write it in the present tense.
- Keys to Success: Be sure to stress the keys that will make the difference between your business’ success and failure. These are things you must accomplish in order for your business to succeed according to your business plan. An example of a key to success could be a volume sales target.
It’s best to leave writing the executive summary until you’ve written all other parts of your plan, since the executive summary captures the key elements of all of those business plan components.
This section of the plan describes the nature of your business. It explains the ownership and legal establishment of the company, detailing whether your organization is a corporation, partnership, sole proprietorship, or limited liability partnership, for example.
Here you’ll also discuss who are the owners of the company and the proportion of their ownership. You’ll want to state what type of corporation your company is, and whether it is privately or publicly held.
If your business is a startup, it’s very important you provide details about your startup costs, assets, investments and loans. This lets investors and lenders see the true extent of your position before you start your business.
Products or Services
This section is simply summarizes the products or services your business offers, how they are offered or distributed to your customers, and your plans to develop or expand upon your current offering of products and services.
1 – 3 paragraphs is a good size for this component of your business plan. Keep in mind that while your product or service offering is an important part of your business, it’s not the be-all and end-all of your business from an investor’s or lender’s perspective. The business plan components that follow carry much more weight.
Market Analysis is one of the most sections of your plan, because it’s here that you will prove that an open-to-buy market exists for your product or service.
This section involves extensive research about your industry, your consumer, and the current economic trends your business faces. Depending on several factors, you will need to either hire a research agency or purchase existing market or industry reports.
The findings from your research efforts will form this section of your plan, ultimately describing who your target consumers are. Your target market may be just one segment, or multiple segments of the larger market.
Either way, you will explain why they fall within your target market, and elaborate on their attitudes, perceptions, past buying patterns and future buying intentions. You might even go as far as asking your potential target markets if they would buy your product or service given various circumstances, and what price they would be willing to pay for it.
You will also need to provide demographics of your target market segments, and the trends surrounding each segment.
For example, are these segments growing or shrinking demographically? Is their buying power increasing or decreasing? Is the demand for your product or service growing or shrinking among these groups?
Depending on your product or service and your research, your segments could be any combination of various age groups, gender, income levels, occupation, employment status, marital status or interest groups.
You will need to be the judge, and the whole purpose of research is to help you, your partners and shareholders make clear, objective decisions about your market.
It’s also good due diligence, letting potential investors and lenders know that your business plan is based on sound evidence of a market, as evidenced in your research findings.
It’s a very good idea to include a pie chart showing the proportion each of your target segments represent to your business. It’s also important to include a table showing what percentage of these target markets your business will penetrate in each year included in your business plan.
Many entrepreneurs fail to recognize the importance of this component of the business plan. Don’t be one of them!
Marketing and Sales Plan
Your marketing and sales plan is is critical in the eyes of potential investors and lenders, because your marketing and sales efforts are the money-making machine of your business. There are actually four components to the marketing and sales plan:
Firstly, you must show in this section how your business is different or unique from its competitors, and what advantage or edge you have over them. You should also clarify how you plan to sustain or grow this competitive edge.
Secondly, you need to detail your marketing strategy for your business and its products or services. In other words, how are your target consumers going to become aware and interested in your products or services? What messages, images, perceptions do you want your target consumers to associate with your business, products and services?
Thirdly, your plan should include details of your sales strategy. While your marketing efforts bring potential customers to your doorstep, your sales efforts will be solely aimed at closing the deal and creating repeat, loyal business. It’s one thing to have a line at your door; it’s quite another to have capable sales staff and systems to persuade consumers to buy. But the two go together like hand and glove.
Your sales strategy clearly shows how your business will close potential buyers, how it will compensate sales staff, and take and process orders. It will also clarify how you will deliver the final product or service as well as the conditions surrounding your business’ sales.
You should include a monthly sales forecast for the first year of your business plan, and yearly sales forecasts for each year in the plan. You’ll also need to justify your sales forecasts by linking your marketing and sales efforts together, and basing both on your market analysis.
Finally, your marketing and sales plan should include a set of milestones. These are the key accomplishments within your marketing and sales strategy. Your milestones will consist of launches and achievements.
For example, if you will be launching a significant marketing campaign on a certain date, it should be present among other milestones. Achieving a certain volume or monetary value of sales by a certain date is another example of a milestone to list. for each milestone, be sure to state the start and end dates, budget, and the manager and department responsible.
Do you need a complete marketing plan as a separate document?
Depending on the purpose of your business plan and your audience, your marketing and sales plan may span from a few to several pages. If necessary, your business planning efforts may even warrant a separate, detailed marketing plan.
Your market analysis may be thorough and your marketing and sales strategy may be very effective. But few stakeholders in your business are going to be convinced that your business can develop, sustain and grow without a strong and experienced management team, supported by capable staff.
Your management plan details who will manage your business, and how they will manage it. Here you give the credentials and achievements of your management team and the principles that will guide it.
Equally important to your management team is your entire personnel. You’ll need to provide information such as the various positions within your organization and how they relate to each other.
In this section, you should also list these positions and the costs associated with each. For example, you can include a table listing each position and the associated salary. Be sure to break down labor costs by month for the first year, and annually for each year in the plan.
The financial plan is going to be one of the first business plan components investors and lenders will glance through.
Now, it’s important to note before we go further that many inexperienced entrepreneurs will overestimate the financial results of their business.
This runs contrary to what investors and lenders look for. In fact, your financials should be based on the worst-case scenario. This not only benefits you as a business person, since you will use the business plan as a blueprint for your business success. But it also pleases investors and lenders to know that you can profit and maintain a positive cash balance under the worst conditions.
Of course, if after careful review of your worst-case scenario, your business is not going to generate a profit, or is going to face cash flow challenges, you’ll then need to reconsider your entire business strategy, or whether it’s wise to move forward with the business at all.
Whatever the case be honest with yourself and others in planning your business plan financials.
While we won’t go into great detail here, the following make up the core of your financial plan:
- Startup Funding (if your business is a startup, show your funding sources and values)
- Key Assumptions (you’ll need to make consistent financial assumptions throughout your business plan, and state each of your assumptions in the plan)
- Break-even Analysis (calculate at what point sales and profits cross, showing how much sales your business will need to generate to cover your monthly costs)
- Profit and Loss/Income Statement (you will need to project monthly profit statements for the first year of your plan, and yearly profit statements for each year of the plan. You will also need to show your monthly and yearly gross margins if your business sells products rather than services)
- Cash Flow (you will need to project the cash inflows and outflows in your business. This will be based on both cash and credit sales, and will depend on your accounts receivable and accounts payable turnover. Ultimately, your business must consistently create a positive cash flow and always maintain a positive cash balance in order to survive. Again, monthly for the first year, and annually for each year of the plan)
- Balance Sheet (you will need to project the assets, liabilities and equity of your business. Project monthly for the first year of the plan and annually for each year of the plan)
- Financial Ratios (this is a list of key financial ratios resulting from your financial projections. Key ratios include current, acid-test and debt to asset ratios. These ratios indicate the strength and liquidity of your business, and help investors and lenders make careful decisions about the risks or rewards involved in funding your business. They also help you determine whether your business concept is feasible and if your business will be solvent and profitable)
Adding details – The Appendix
The Appendix, as you know, shows up in the back of your business plan, and is also an important business plan component. Rather than boring your audience with details, the key business plan components should emphasize the big picture, showing how your business, and its product or service will succeed with your target consumer.
Instead, stick the detailed tables and charts in the appendix, so readers can check for details, particularly detailed financials, after they have grasped the big picture of your business plan. Here’s what you’ll likely find in the appendix:
- Detailed Sales Forecast
- Detailed Projected Personnel Payroll Costs
- Detailed Projected Income Statements
- Detailed Projected Cash Flow Statements
- Detailed Projected Balance Sheets
Of course, if you’ve been in business for a while, you might also want to show your past performance as justification for your projections. In that case, you can include previous years’ statements for the above.
Wrapping up your business plan
As you can see, these key business plan components are basically smaller plans within the big plan. Therefore, focus on each of the business plan components as small plans and build them carefully and thoroughly.
Don’t forget though – while it’s important to write a business plan to persuade potential investors and lenders to buy-in to your business, it’s more important to actually create a business plan that clearly maps out the strategy you will implement over the next 3 – 5 years. Write each of the business plan components with this in mind.
Also, remember that while your business plan is a blueprint to your business looking ahead, it’s an equally important measurement tool looking back. Follow your business plan, make adjustments as necessary, and evaluate your business performance with a regular review of your plan.