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Why Write a Business Plan?

So you’ve got a brilliant idea for a new product or service. You feel energized, inspired, and ready to forge ahead. Your first challenge: Write a business plan.

You may be thinking: “Why should I bother taking the time to draft a formal plan? Shouldn’t I just get going already?” If you’re working at a large company and your boss asks you to put together a plan before you move forward with a new product extension, you may feel equally frustrated. “What’s the point of this busywork?,” you might think. “Why can’t I just take the plunge?”

Don’t fall into this trap. Writing a business plan for internal or external ventures is beneficial in a variety of ways, including gaining buy-in and generating enthusiasm for your idea, improving your odds of successfully creating a new product or service, establishing a company, raising capital, generating sales, and sustaining your business over time.

Whether you’re planning to build a new company from scratch, expand an existing firm, spin off from a parent corporation, or even start an initiative within an established organization, writing a business plan gives you an opportunity to thoroughly evaluate your idea. It’s also a way for your audience—namely potential investors, managers, and the people who control vital resources you need to start and operate your business—to assess the feasibility of your concept. Your goal is to create a road map for your business that helps you navigate the opportunities and inevitable obstacles you’ll face and, perhaps most important, develop strategies to avoid problems before they arise.

This book shows you how to craft a persuasive argument for your idea by walking you through the elements of writing a business plan and providing a fully developed primary case study of an imaginary and hypothetical venture—TechnoExercise Corporation—which we’ll follow throughout the chapters.

Getting started

Most business plans devote too much ink to numbers and too little to the information that matters most to potential investors, according to William Sahlman, a professor at the Harvard Business School and an expert in entrepreneurial ventures. After all, savvy investors understand that financial forecasts for a new company—particularly detailed, month-by-month projections that extend for years and years—are typically nothing more than wildly optimistic fantasies. In light of this, Sahlman recommends organizing your business plan around a framework that assesses four factors that are critical to every new venture:

• The people. Those who will be starting and running the business, in addition to any outside parties who will provide important resources.

• The opportunity. A profile of the business itself: what it will sell and to whom, whether it can grow and how quickly, what its economics are, and what might stand in the way of success.

• The context. The big picture—the regulatory environment, interest rates, demographic trends, inflation, and so on. Essentially, factors that inevitably change but that you cannot control.

• The risk and reward. An examination of everything that can go wrong and right, as well as a discussion of how the team can respond.

With Sahlman’s four critical factors in mind, you’re ready to start thinking about what information you’ll gather to create the most compelling business plan you can. As you begin your research, ask yourself some important questions:

• What’s your purpose? If your business plan is a proposal within the resource-rich environment of a large corporation, certain parts of it—such as the marketing or operations sections—could be shorter and less developed than other sections. In this case, you ought to focus on the value proposition and competitive analysis. On the other hand, if you’re using the plan to raise money from venture capitalists, you ought to focus more on the opportunity itself and the management team.

• Who’s your audience? Knowing who will be reading your plan and why and having some sense of their goals and needs will help you tailor your message. To learn about your audience’s particular requirements and motivations, do some research. Tap your network—ask colleagues and other industry professionals for their views on the problem you’re trying to solve. Also, think about your proposal from the perspective of your audience. A corporate management committee or board of directors, for instance, will consider your idea within the context of the company’s other initiatives and may look for potential cost savings or other sales opportunities related to your idea. Investors and lenders, on the other hand, may want to know about the breakeven points and the business’s longer-term potential.

• What do you want? Think about your ultimate goal. Do you need a corporate stamp of approval or the active support of upper management? Are you just looking for funding, or do you want connections with other investors or business partners? Do you want to repay a loan, or are you willing to share ownership and profits?

What information will you need?

Now that you’ve organized your thoughts, you need to determine whether you have all the relevant material on hand. Some of this will be financial and legal information. For example, have you confirmed the necessary production costs for your product? Have you considered the most appropriate legal structure and tax status for your business? There are many sources for this kind of information. You should identify trade journals that target business owners in your industry, seek out research by respected analysts, and scour your network for experts who may be able to help you develop a fuller picture of the business environment. Online resources are also available, including your local chamber of commerce’s website and the official sites of the Small Business Administration, the Internal Revenue Service, the Census Bureau, and state departments of economic development.

The structure of a business plan

The most common business plan structure opens with short, general summaries (such as the executive summary and the business description) and then proceeds to more in-depth explanations in the body of the plan. That’s where you’ll provide thoughtful descriptions of your business’s fundamental elements and concerns. The attachments at the end include the most detailed information—financial data, management résumés, and so forth.

Writing a business plan is a big undertaking that requires time, dedication, and discipline. Rather than tackling it all at once, go section by section. Dividing the task into manageable chunks will help you better plan your time. Throughout the process, seek input from others. Talk over your idea with mentors, business partners, and colleagues. Ask them to look for gaps in your plan or potential red flags. Then make adjustments as you go.

Most business plans contain the following components, which we’ll cover in more detail throughout the book:

• Cover page: This ought to include the name of your business or project, as well as your name and contact information.

• Table of contents: An at-a-glance view of which topics will be covered. Use straightforward language to allow readers to easily skim or flip through to find what they’re looking for.

• Executive summary: A brief and formal explanation of what your company is, where you want it to go, and why it will be successful.

• Business description: A high-level overview of your proposed venture.

• Industry background: Historical data as well as current information about the shape, size, trends, and key features of the industry.

• Competitive analysis: A breakdown of current and prospective rivals.

• Market analysis: Your assessment of your target customers and their wants, needs, and demographics.

• Management summary: An introduction to your team as well as a description of how they will work together to form an effective and successful unit.

• Operations plan: The flow of the business’s daily activities and the strategies that will support them.

• Marketing plan: Your detailed strategy for how you intend to sell your product or service.

• Financial plan: A synopsis of the current status and future projections of the company’s financial performance.

• Attachments and milestones: Additional documents that supply more detailed information about elements of the plan.

Of course, not all business plans follow this model precisely. As you’ll see in the next chapter, your plan may combine some of these sections, add new ones, and eliminate others, based on your audience and its needs.