Elements of a Business Plan

Creating a business plan can be the first step toward successfully launching a new company or expanding your existing firm. Or it could be the first major obstacle if you don’t do it right.
   In many cases, a business plan is written to request money from a bank or individual investors. But business plans can also help your company coordinate self-funded projects. That’s because a formal, written business plan requires you to examine and reexamine issues—ranging from internal costs to external competition—that you might otherwise take for granted while struggling to launch a new company or keep an existing firm going.
   At its heart, a good business plan forces you to ask essential questions such as: What business am I really in? What’s going on in my industry? Who are my customers and what do they want? Who is my competition and what are their strengths and weaknesses? What are my goals and objectives?
   And while the end product of creating a business plan is a physical document that can average anywhere from a dozen to more than 100 pages, the real benefit lies in the process itself, says Paul Tiffany, coauthor of Business Plans for Dummies.
   Tiffany likes to quote Gen. Dwight D. Eisenhower who, during World War II, noted: “Plans are nothing—planning is everything.” Consequently, the “benefit of planning is not ultimately the written document on paper,” Tiffany says, “but rather that it forces managers and executives to logically think through the nature of the business they want to enter or which they’re already in, and how they’re going to succeed in it.”

A Road Map to Success
One consultant says your business plan “may be the most important document you’ll ever prepare.” And writing such a plan seems to be linked to how well businesses manage expansions and even whether they survive their first year in operation.
   There’s an oft-repeated statistic that says approximately 30 percent of new businesses fail within 12 months of opening. But Max Fallek, director of the American Institute of Small Business (Minneapolis), adds this proviso: 90 percent of new firms that prepare a business plan are still in business after that winnowing first year.
   Moreover, a recent survey by the institute examined more than 140 firms that prepared business plans prior to an expansion and more than 70 companies that attempted to expand without such a plan. Ninety percent of those with plans reported that their expansion had been successful or satisfactory, Fallek notes. In contrast, only 60 percent of the companies without business plans said their expansions were successful or satisfactory.
   Twenty-three percent of the plan-less companies—more than twice the number for those with plans—reported that their expansions were unsatisfactory or outright failed. Additionally, some 17 percent of the companies without plans said it was still too soon to tell whether their expansions would succeed.
   “Road map” is the term that scrap processors from coast to coast use to describe their business plans. At Carolinas Recycling Group L.L.C. (Greenville/Spartanburg, S.C.), formed last year by the merger of Industrial Metal Processing Inc. and Spartan Iron & Metal Corp., the new company’s business plan is “a road map to where we want to go this year and how to get there,” explains CFO Mike Munafo.
   Likewise, Jay Lite, president and general manager of Sun-Lite Metals (Los Angeles), calls the business plan he used to help fund a major expansion “a road map that I can follow to success.” Lite also stresses the self-educational side of the process: “It gave me insight as to where my business is going. By doing research, I learned a new way to market my business.”

Creating a Plan
Sun-Lite hired a consultant to prepare its business plan, while Carolinas Recycling produced its document in-house. But regardless of how the plan gets created, there are certain elements that any plan must include, experts say.
   A good business plan can be divided into four sections, explains the U.S. Small Business Administration (SBA) in an online workshop titled The Business Plan Road Map to Success (see “Words of Advice” above for details on this and other resources): 

1. The “description of the business” should include basic explanations of:
• what type of business you plan to operate;
• what products or services you’ll offer (and why customers will want these products or services);
• what kind of profits and/or growth opportunities are possible;
• the business’s facilities, hours of operation, and location (especially why the location is desirable); and
• other information such as any unique aspects of your business or special features that would be especially appealing to customers.

2. The “marketing plan” focuses on what SBA suggests will largely determine the success or failure of your business: how well you understand your customers’ likes, dislikes, and expectations. Identifying your customers—by age, sex, income and education level, and residence—is key. You must also determine whether the overall market for your product or service is growing, declining, or holding steady, as well as what share of the market you can expect to have. This section should explore your pricing strategy, your direct and indirect competitors (and how strong each is), along with your advertising and public relations plans, SBA says.

3. The “management plan” explores that oft-cited “most valuable asset” for any company: its employees. Starting with yourself, name the people who will run your business and detail the skills they possess that will help your company succeed. This is the place to discuss:
• the business backgrounds of you and your staff;
• the strengths and weaknesses of your management team (with an emphasis on how any weaknesses will be overcome);
• specific duties of key personnel;
• hiring and training plans for the overall work force; and
• salaries, benefits, vacation policies, and other such personnel issues.

4. The “financial management plan” discusses both the startup costs of opening your business or launching your expansion and the operating costs for keeping your company in business. Information to include here ranges from basic costs such as rent and payroll, taxes and depreciation, along with a capital equipment and supply list, balance sheet, income and cash flow projections (based on a three-year summary, SBA says), plus any loan applications. You’ll also need to explain your accounting system and inventory control methods, as well as your current cash reserves.
   In addition, other key elements (which can be included as addenda) include an executive summary, financial projections, and various other supporting documents—ranging from company brochures and resumes of your management team to charts and graphs, and photocopies of relevant newspaper or magazine articles about your company or its industry.
   Keep in mind, though, that while your business plan will contain elements of budgeting and marketing, a budget or marketing plan by itself doesn’t constitute a business plan. “A budget is short-term driven while a business plan takes a longer-term approach to business,” says Paul Tiffany.

Finding the Right Balance
Balance is essential to writing a good business plan, notes Larry Cobb, owner of Business Plan Preparation Service (Whittier, Calif.). You have to find a balance between providing too much information and not enough, between making optimistic projections about your business’s potential and overselling yourself, even between listing cold, hard facts and showing some creative flair in the document’s writing or design, explains Cobb, who wrote Sun-Lite’s business plan.
   Ten to 20 years ago, thick, heavy business plans were popular. “The more pages, the better,” Cobb says. “It showed attention to detail.” But today, banks and investors don’t want to read such tomes. They just want the facts, the bottom line, and the supporting data, he says. So, while business plans might have easily run 150 to 200 pages a decade or more ago, Cobb says the plans he prepares today average 40 pages, with even the most technical projects pushing only 50 or 60 pages.
   Tiffany agrees that the trend is toward shorter, more concise documents, though he adds that length is rather subjective. He has seen “perfectly workable plans of 15 pages,” as well as some that exceed 100 pages.
   And while it certainly helps to break up long stretches of gray text with a chart or graph—even a photograph of your scrap facility or any special equipment you use—you don’t need the skills of a Hollywood screenwriter to produce a decent business plan, Cobb stresses. Techniques as simple as using topic headings for each paragraph, so the reader can get the gist of the information by skimming the page, or putting the most important information in a box to catch the reader’s attention are all the flash you need to augment the substance of your facts and figures, he says.
   What’s more important, experts agree, is to be realistic in what you say about your company, your industry, and the future of both.
   “Don’t make assertions without backing them up,” Cobb says. When you make income projections, be sure to explain the rationale behind the numbers. When you stress your company’s future performance—say, growing X-percent a year—explain the steps you’ll take to get there. Providing one real-life example to substantiate your point, to show you did enough market research, will help, Cobb says. Conversely, “not backing up your statements will make the investor or banker wonder how credible you are.”
   Also, if your business plan is soliciting money from a bank or investors, explain how that money will be spent, Cobb says. And be up front about real or potential problems you might face. Risk “will be in your investors’ minds even if you don’t mention it,” he notes, so a proactive approach gives you the chance to show you’re aware of these risks and explain how you’ll handle them.
   In Sun-Lite’s business plan, for instance, Cobb was impressed with the company’s environmental protection measures, so he included that information in its business plan, “which earned good feedback later on from a banker,” he notes.
   It’s also critical to be realistic about the nature of the market you’re in, Tiffany says. You can’t afford to underestimate your competitors or overestimate your own capabilities. One key point to include is an explanation of what competitive advantage your company brings to the market. And while the answer to that question might seem obvious to you, the reality could be quite different.
   Tiffany points to the example of U.S. Steel, which started off in 1901 with a 70-percent market share. But such market dominance didn’t automatically give the firm its greatest competitive advantage. In fact, Tiffany says, over the next half-century U.S. Steel’s market share fell while its profits remained high.
   The reason? U.S. Steel controlled most of the iron ore reserves in the United States, Tiffany notes, which meant that even when other steelmakers entered the market, they still had to buy their raw materials from U.S. Steel.
   While your business plan might not uncover an equally dramatic factor in your company’s favor, you do need to focus attention on why customers would do business with your firm rather than your competitors and how you can sustain that advantage, Tiffany advises.
   He also stresses the importance of including something about your company’s vision and values in the business plan. Though such ideas represent the “soft” side of planning, Tiffany argues that all businesses ultimately face “choices.” The best firms define their values, he explains, “so that when they get to a fork in the road, they have a value that drives them in one direction or another.”
   But at the same time, Tiffany recommends keeping a large enough cash reserve on hand to see you through unexpected rough spots. “Don’t kid yourself that the plan you put on paper will be an exact replica of the future,” he warns.

By the Numbers
While it’s quite possible to prepare a successful business plan entirely on your own, it’s wise to seek professional help with your balance sheet and cash flow and income statements unless you’re thoroughly familiar with such documents, advises SBA.
   In addition to writing and consulting services for preparing business plans, there are also numerous books—perhaps 100 or more, one author estimates—designed to help businesses do it themselves, plus various software packages. But beware of including “boilerplate” information from such resources that bankers or investors might have already seen in other business plans.
   Budget from $1,000 to well over $5,000 for preparing the business plan based on factors ranging from how much research you need to how fancy a finished document you want (for instance, if you want to create charts and graphs or include photographs or other graphic elements).
   And in most cases, be prepared to devote some time to the task. The basic outline of a business plan can be finished in “one long day,” Tiffany notes, provided you already have most of the information you need on markets, industry, financial projections, and so on. Otherwise, it can easily take well over a month to prepare a good document and even six months or more for a startup or for entering a major new area of business.
   Unfortunately, “lack of patience” is one of the greatest obstacles many firms face in preparing their business plans properly, says Max Fallek. They just don’t want to take the time to examine all the necessary aspects of their business and industry, he explains.
   Another problem, notes Tiffany, is letting one person dictate what should go in the plan. “Plans that work are group efforts,” he stresses.
   That’s certainly what Carolinas Recycling learned. Its business plan evolved over several years, beginning as a document that Mike Munafo prepared mostly by himself for the former Industrial Metal Processing but which now involves 25 to 30 people who provide information for the plan. What’s more, the plan gets reviewed and updated monthly.
   And thanks to that plan, Carolinas Recycling not only secured the bank financing for its merger, but within one month of the merger “we had a budget in place and actual numbers to compare to our projections to know if we were on target,” Munafo notes.

Keeping the Plan Alive
As Carolinas Recycling learned, a business plan helps you create benchmarks to track your company’s progress toward financial and production goals or other objectives. Moreover, by reviewing its plan regularly, Carolinas Recycling avoids a problem that too many companies create for themselves by treating their business plan as something unchangeable.
   “Once it’s committed to paper, too many managers say, ‘That’s it, reality must now conform to our plan!’” Tiffany says.
   But in fact, business plans should be “living” documents—flexible, fluid, and dynamic. Larry Cobb recommends making copies and giving them to key supervisors. Then schedule regular meetings to review the information, determine what needs to be changed, and give people a chance to participate. Add extra pages to the plan for notes and comments, Cobb says, so people know “it’s not just a pretty document that you’ve got to keep unblemished, but a working document.”
   And always remember that your business plan is just a projection—the best you could make at a given point—of where you think the market’s going and what you’re going to do to about it. “But it will change,” Tiffany notes, “and sometimes you even have to concede that the fundamental assumptions on which the plan was based are gone—the market changed so dramatically that you’re back to square one.”
   But don’t worry—that’s what business plans are for. “The plan is never set in cement,” Fallek notes. “Instead, it allows you to make detours, change directions, and alter the pace you set in starting or running the business.”
Sort of a “living” road map, you could say. 

WORDS OF ADVICE 
There’s no shortage of resources available to assist you in writing a business plan. Here’s just a sampling:
• The U.S. Small Business Administration, which has offices 
in every state and many cities, offers free information on writing business plans. Its Web site (www.sba.gov) includes a business plan workshop (www.sba.gov/starting/indexbusplans.html) that features a basic business plan outline as well as sample sections from a fictitious business plan. You can also call its toll-free answer line (800/827-5722) for advice. 
• Business Plan Preparation Service can be reached at 14059 Trumball St., Whittier, CA 90604; 562/944-3344 (fax, 562/944-0432); e-mail: info@bizplanprep.com; or visit www.bizplanprep.com/home.html (where you can request a free business plan outline).
• The American Institute of Small Business is located at 7515 Wayzata Blvd., Suite 129, Minneapolis, MN 55426; 800/328-2906 or 612/545-7001 (fax, 612/545-7020); e-mail: max@aisbofmn.com; or visit www.aisbofmn.com. The institute’s publication, Business Plan Example, costs $29.95 and features a complete 40-plus-page business plan.
• Business Plans for Dummies by Paul Tiffany and Steven Peterson can be found in the business section of most major bookstores and online booksellers. Published by IDG Books Worldwide (800/762-2974), this book has been called “the best work that you’ll find on this subject” by Inc.
   There are also numerous software packages available for writing business plans, including Adarus Business Plan (www.adarus.com), Anatomy of a Business Plan and Automate Your Business Plan (www.4expertise.com/store.html), Business Plan Pro (www.paloaltosoftware.com), Planmaker (www.planmaker.com), and PlanWrite (www.brs-inc.com/pwrite.html). Prices vary, with several from $100 to $200.