Components of a Business Plan

Overview

Learning Objectives

After completing this chapter, you will be able to:

• Develop a comprehensive business plan draft.

This chapter describes an approach to writing your draft business plan. It also outlines the elements of a comprehensive business plan so that they can be used as a template for starting your business plan.

Figure 7 – Initial Business Plan Draft

Source: Lee Swanson, https://mountainscholar.org/bitstream/handle/20.500.11785/572/BookId-495-BusinessPlanDevelopmentGuide.pdf?sequence=1&isAllowed=y
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 License.

Effective Business Plans

Effective business plans:

• Provide statements that are backed by evidence or data
  
• Include context and references with every table, figure, or illustration
  
• Include tables and financial information that is relevant, clear, concise, and exclude unnecessary material
  
• Present timelines for distinct purposes
  
• Exclude generic sections but have clear and customized to the particular business or its environment

Evidence-based claims strengthen your business plan.

Providing context for tables and figures is critical.

Writing the Draft Business Plan

• Use the following sections of this chapter to prepare an outline for your business plan. You should do the headings feature in Word so that you can later automatically generate a table of contents.
  
  • This will provide you with a template into which to insert the information needed for your plan.
    
• Insert the relevant parts of the written work produced during Essential Initial Research into your new business plan template. You can do this in one of two ways.
  
• First, you can copy and paste the results of your essential initial research into the sections of your business plan template where you believe that they can be used to support or justify the strategies and other decisions you will later describe in those sections. Of course, you can later move those parts of your environmental scan as needed as you develop your plan. In general, this strategy results in a stronger business plan.
  
• Second, you can insert the results from your societal-level and industry-level analyses in an Operating Environment section as listed in the outline below. As described below, the market- level analysis will probably always fit best within the Marketing Plan and the firm-level analysis might fit across all of the plans within the business plan.
  
  • Completing this step will give you the satisfaction of seeing some of your work so far taking shape in the form of a business plan.
    
  • Also, inserting the results from your environmental scan into the relevant sections of your plan should later provide you with the stimulus and support you will need to develop solid, realistic, evidence-based strategies and decisions for those sections.
    
• Incorporate your business model into your new business plan template. As there is no section in a business plan in which you specifically describe your business model, you will need to incorporate your business model elements into appropriate sections of your plan.
  
• Fill in as much relevant information as you can under as many of the headings on your business plan template as possible.
  
  • You will normally include both (1) information that you got from particular sources and (2) information that has not come from any source, but that is based on an assumption you made (and that you might intend to replace later with more accurate information from valid sources). Follow the following practices:
    
• Every time that you insert something into your business plan template that you got from a source, clearly indicate from where you got that information. For example, if you list the office equipment and furniture that you need along with their exact costs as taken from suppliers' catalogue, clearly indicate from which catalogues you got the information. Similarly, if you spoke to an industry expert who recommended that you manufacture your product in a particular way, if you can (if you got the person's permission to do so) clearly indicate who you spoke to and what their credentials are.
  
  • When you do this, you help establish your credibility as a business plan writer, and your business plan's credibility. It also might save you time later when you discover that you need to add a similar item along with its cost to your list.
    
  • Note: Do not reinvent the wheel by “inventing” your own method to reference your sources, and do not use multiple methods. Use one (and only one) proper and well established referencing method, like APA. This will improve the degree of professionalism of your plan.
    
• Every time that you insert something into your plan that did not come from a source, a best practice is to highlight that part of your plan, possibly by using a distinct font color. The objective will be to ultimately replace all of those assumptions with source-backed information. When you do so, change the font to its regular color so you can quickly and easily see what still needs to be sourced.
  
  • Note that if you are an expert source on something – maybe you are a construction expert that business plan readers will trust to do estimates on building costs – you should establish your credentials and clearly indicate when some of the information in your plan is based on your own expert knowledge.
    
  • When you flag your assumptions in this way, you can quickly and easily see what information needs to be replaced with sourced information before you finalize your business plan.
    
• Use the appropriate schedule in the spreadsheet templates to record estimated sales revenue for each month. You must base these sales projections on well-reasoned criteria and set them up in your spreadsheets using formulas so that if you need to change a criterion later, you can change a number in one cell or a limited number of cells rather than have to change all of them.
  
  • Projecting realistic sales can be difficult, but setting up a method for doing so early gives business plan writers a significant start toward completing their business plan. A well- developed sales model that takes advantages of the powers of electronic spreadsheets gives business plan writers the opportunity to relatively quickly easily make necessary changes to their assumptions and overall estimates when needed.
    
• Use the spreadsheet templates by filling in all of the numbers you have in the various schedules. As you are doing in the written part of your plan, use a distinct font to flag numbers that are based on assumptions.
  
  • When you have actual numbers, be certain that it is clear to a reader what source you used to get those numbers. When you use the schedules provided on the spreadsheet templates, and any others that you add, you will be well on your way to developing the financial component of your business plan.
    

Providing references strengthens the credibility of claims and makes the business plan stronger.

If you don't have a source to a claim, plant a flag and move forward, returning later to insert the source.

General Business Plan Format

LETTER OF TRANSMITTAL

A letter of transmittal is similar to the cover letter of a resume. The letter of transmittal should be tailored to the reader, clearly identifying the customized ask of the potential investor or lender. It should be short and succinct, delineating the ask (i.e. funding, specialized recruiting, purchase product or service, obtain advice, etc.) within a few paragraphs. It should not summarize the business plan, as that is the job of the executive summary.

TITLE PAGE

Include nice, catchy, professional, appropriate graphics to make it appealing for targeted readers

EXECUTIVE SUMMARY

• Can be longer than normal executive summaries ... up to 3 pages
  
• Write after remainder of plan is complete
  
• Include information relevant to targeted readers as this is the place where they are most likely to form their first impressions of the business idea and decide whether they wish to read the rest of the plan

TABLE OF CONTENTS

LIST OF TABLES

Be certain that each and every table, figure, and appendix included in the plan is referenced within the text of the plan so the relevance of each of these elements is clear.

LIST OF FIGURES

INTRODUCTION

• Indicate the purpose for the plan
  
• Make appealing to targeted readers

Business Idea

• May include description of history behind the idea and the evolution of the business concept if relevant

Value Proposition

• Explain how your business idea solves a problem for your expected customers or otherwise should make them want to purchase your product or service instead of a competitor's

Vision

• Generally outlines what the owner intends for the venture to be
• A good one will inspire all members of the organization
  
• It should help stakeholders aspire to achieve greater things through the venture because of the general direction provided through the vision statement
  
• After articulating a good vision, the business plan writer should consider what achieving the vision looks like. Many business plan writers write their vision and leave it at that. The problem with this approach is that they often then do not take the necessary steps to illustrate how the strategies they outline in their plan will move them toward achieving their vision. If they make this mistake, their strategies might indicate that they are fulfilling their current mission, but are not taking steps to move beyond that.
  
• Vision statements should be clear with context throughout the business plan. For example, if the goal is to be the premier business that dues xxx in Saskatchewan, does that mean you do that in one place and are considered the best at doing it even though you only have a small corner of the market, or does it mean that you have a large market share as you have many locations across the province.
  

Vision statements should be clear with context throughout the business plan.

Mission

• Should be very brief – a few sentences or a short paragraph
  
• Indicates what your organization does and why it exists – may describe the business strategy and philosophy

Values

• These are reflected in five to ten short statements indicating the important values that will guide everything the business will do
  
• They outline the personal commitments members of the organization must make, and what they should consider to be important
  
• They define how people behave and interact with each other
  
• The proposed venture's stated values should be reflected in all of the decisions outlined in the business plan, from hiring to promotions to location choices
  
• They should help the reader understand the type of culture and operating environment this business intends to develop

Major Goals

• Describe the major organizational goals
  
• Ensure each goal is:
  
  • Specific, Measurable, Action oriented, Realistic, and Timely [SMART]
    
  • Realistic, Understandable, Measureable, Believable, and Achievable [RUMBA]
    
• Be certain all goals perfectly align with everything in plan
  
• You should write, or re-write this section as the second last thing you do before finalizing your business plan by doing the final proof-read, polishing it up, and printing it (writing the executive Summary will be the final thing you should write).

Having goals that are SMART and RUMBA strengthens the business plan.

OPERATING ENVIRONMENT

Trend Analysis

• Include an analysis of how the current and expected trends in the political, economic, social, technological, environmental, and legal (PESTEL) factors will impact the development of this business
  
• Consider whether this is the right place for this analysis
  
• It may be better positioned in, for example, the Financial Plan section to provide context to the analysis of the critical success factors, or in the Marketing plan to help the reader understand the basis for the sales projections

Providing strategies to capitalize on trends is a winning formula.

Industry Analysis

• Include an analysis of the industry in which this business will operate
  
• A common approach is to apply the Five Forces Model (Porter, 1985)
  
• Consider whether this is the right place for this analysis
  
• It may be better placed in, for example, the Marketing Plan to enhance the competitor analysis, or in the Financial plan to provide context to the industry standard ratios in the Investment Analysis section

Of course, your trend analysis will also include a market-level analysis (using a set of questions, like those listed in Chapter 2) and a firm-level analysis (using tools like a SWOT analysis / TOWS matrix, various forms of financial analyses, a founder fit analysis, and so on), but those analyses are usually best placed in other sections of your plan to support the strategies and decisions you present there. The market-level analysis will inevitably fit in the Marketing Plan section, but the firm-level analysis might be spread across some or all of the Operating Plan, Human Resources Plan, Marketing Plan, and Financial Plan sections.

OPERATIONS PLAN

• Key questions answered by operating plans:
  
  • What are your facility plans?
    
    • Where will your facility be located?
      
      • Expressed as a set physical location
        
      • Expressed as a set of requirements and characteristics
        
    • How large will your facility be and why must it be this size?
      
    • How much will it cost to buy or lease your facility?
      
    • What utility, parking, and other costs must you pay for this facility?
      
    • What expansion plans must be factored into the facility requirements?
      
    • What transportation and storage issues must be addressed by facility decisions?
      
    • What zoning and other legal issues must you deal with?
      
    • What will be the layout for your facility and how will this best accommodate customer and employee requirements?
      
  
  
  • What constraints are you operating under that will restrict your capacity to produce and sell your product?
    
    • Given these constraints, what is your operating capacity (in terms of production, sales, etc.)?
      
  • What is the work flow plan for your operation?
    
  • What work will your company do and what work will you outsource?

Operations Timeline

• When will you make the preparations, such as registering the business name and purchasing equipment, to start the venture?
  
• When will you begin operations and make your first sales?
  
• When will other milestone events occur such as moving operations to a larger facility, offering a new product line, hiring new key employees, and beginning to sell products internationally?
  
• Sometimes it is useful to include a graphical timeline showing when these milestone events have occurred and are expected to occur

Completing the operation plans further adds to the overall business plan.

Business Structure and Other Set-up Elements

• Somewhere in your business plan you must indicate what legal structure your venture will take. Your financial statements, risk management strategy, and other elements of your plan are affected by the type of legal structure you choose for your business. For example, all partnerships should have a clear agreement outlining the duties, expectations, and compensation of all partners as well as the process of dissolution. Please Note: Spreadsheet templates are formatted for corporations and will need to be formatted for other forms of businesses.
  • Sole Proprietorship
  • Partnership
  • Limited Partnership
  • Corporation
  • Cooperative
• As part of your business set-up, you need to determine what kinds of control systems you should have in place, establish necessary relationships with suppliers and prior to your start-up, and generally deal with a list of issues like the following. Many of your decisions related to the following should be described somewhere in your business plan:
  • Choose name
  • Check zoning, equipment prices, suppliers, etc.
  • Choose location
  • Arrange lease terms, leasehold improvements, signage, pay deposits, etc.
  • Get business license, permits, etc.
  • Set up banking arrangements
  • Set up legal and accounting systems (or professionals)
  • Order equipment, locks and keys, furniture, etc.
  • Recruit employees, set up payroll system, benefit programs, etc.
  • Train employees
  • Test the products/services that will be offered
  • Test the systems for supply, sales, delivery, and other functions
  • Decide on graphics, logos, promotional methods, etc.
  • Order business cards, letter head, etc.
  • Clearly communicate suppliers, why they are preferred, and set up necessary agreements
  • Buy inventory, insurance, etc.
  • Revise business plan
  • .... And many more things ... including, when possible, attracting purchased orders in advance of start-up through personal selling (by the owner, a paid sales force, independent representatives, or by selling through brokers wholesalers, catalog houses, retailers), a promotional campaign, or through other means

Start-up

• What is required to start-up your business including the purchases and activities that must occur before you make your first sale?
  
• When identifying capital requirements for start-up a distinction should be made between fixed capital requirements and working capital requirements

Fixed Capital Requirements

• What fixed assets, including equipment and machinery, must be purchased so your venture can conduct its business?
  
• This section may include a start-up budget showing the machinery, equipment, furnishings, renovations, and other capital expenditures required prior to operations commencing
  
  • If relevant you might include information showing the financing required ... fixed capital is usually financed using longer-term loans

Working Capital Requirements

• What money is needed to operate the business (separately from the money needed to purchase fixed assets) including the money needed to purchase inventory and pay initial expenses?
  
• This section may include a start-up budget showing the cash required to purchase starting inventories, recruit employees, conduct market research, acquire licenses, hire lawyers, and other operating expenditures required prior to starting operations
  
  • If relevant you might include information showing the financing required ... working capital is usually financed with operating loans, trade credit, credit card debt, or other forms of shorter-term loans

Risk Management Strategies

• Include descriptions of the organization's risk exposure
  
  • Enterprise – liability exposure for things like when someone accuses your employees or products you sell of injuring them.
    
  • Financial – securing loans when needed and otherwise having the right amount of money when you need it
  • Operational – securing needed inventories, recruiting needed employees in tight labour markets, customers you counted on not purchasing product as you had anticipated, theft, arson, natural disasters like fires and floods, etc.
    
• Always include descriptions of the planned strategies for managing each of the risks identified. Identify potential risk exposures, their consequences, risk potential, and mitigation strategies (Figure 8).
  
  • Avoid – choose to avoid doing something, outsource, etc.
    
  • Reduce – through training, assuming specific operational strategies, etc.
    
  • Transfer – insure against, outsource, etc.
    
  • Assume – self insure, accept, etc.
    

Figure 8 – Risk Management Strategies

Completing a risk management plan further adds to the overall business plan.

Operating Processes

• What operating processes will you apply?
  
• Depending upon the type of business for which you are creating your plan you will need to describe different things:
  
  • Retail and wholesale operations
    
    • How will you ensure your cash is managed effectively?
      
    • How will you schedule your employees?
      
    • How will you manage your inventories?
      
    • If you will have a workforce, how will you manage them?
      
    • etc.
      
  • Service operation
    
    • How will you bill out your employee time?
      
    • How will you schedule work on your contracts?
      
    • etc.
      
  • Manufacturing operation
    
    • How you will manufacture your product (process flow, job shop, etc.?)
      
    • How will you maintain quality?
      
    • How will you institute and manage effective financial monitoring and control systems that provide needed information in a timely manner?
      
    • How will you manage expansion?
      
    • etc.
      

Facilities

• May include planned layouts for facilities

Organizational Structure

• May include information on Advisory Boards or Board of Directors from which the company will seek advice or guidance or direction
  
• May include an organizational chart
  
• Can be a nice lead-in to the Human Resources Plan

HUMAN RESOURCES PLAN

• Key questions answered by human resources plans:
  
  • How do you describe your desired corporate culture?
    
  • What are the key positions within your organization?
    
  • How many employees will you have?
    
  • What characteristics define your desired employees?
    
  • What is your recruitment strategy?
    
  • What processes will you apply to hire the employees you require?
    
  • What is your leadership strategy and why have you chosen this approach?
    
  • What performance appraisal and employee development methods will you use?
    
  • What is your organizational structure and why is this the best way for your company to be organized?
    
  • How will you pay each employee (wage, salary, commission, etc.)?
    
  • How much will you pay each employee?
    
  • What are your payroll costs, including benefits?
    
  • What work will be outsourced and what work will be completed in-house?
    
  • Have you shown and described an organizational chart?

Recruitment and Retention Strategies

• Include how many employees are required at what times
  
• Estimate time required to recruit needed employees
  
• Estimate all recruitment costs including:
  
  • Employment advertisements
    
  • Contracts with employment agency or search firms
    
  • Travel and accommodations for potential employees to come for interviews
    
  • Travel and accommodations for interviewers
    
  • Facility, food, lost time, and other interviewing costs
    
  • Relocation allowances for those hired including flights, moving companies, housing allowances, spousal employment assistance, etc.

You might include a schedule here showing the costs of initial recruitment that then flows into your start-up expense schedules

Leadership and Management Strategies

• What is your leadership philosophy?
  
• Why is it the most appropriate leadership approach for this venture? Training
• What training is required because of existing rules and regulations?
  
• How will you ensure your employees are as capable as required?
  
• In which of the following areas will you provide training for your employees?
  
  • Health and safety (legislation, WHMIS, first aid, defibulators, etc.)
    
  • Initial workplace orientation
    
  • Management
    
  • Financial systems
    
  • Sales
    
  • Contracts
    
  • Product features
    
  • Other
    

Performance Appraisals

• How will you manage your performance appraisal systems?

Health and Safety

• There may be legal requirements that should be noted in this section (and also legal requirements for other issues that may be included in other parts of the plan)
  
• Consider pursuing accreditation such as ISO 9000, if so, evaluate the costs, benefits, and time frame
  
• Employees may require WHMIS training or other training including machinery handling

Compensation

• Always completely justify your planned employee compensation methods and amounts
  
• Always include all components of the compensation (CPP, EI, holiday pay, etc.)
  
• How will you ensure both internal and external equity in your pay systems
  
• Describe any incentive-based pay or profit sharing systems planned
  
• You might include a schedule here that shows the financial implications of your compensation strategy and supports the cash flow and income statements shown later

Key Personnel

• May include brief biographies of the key organizational people

Completing the human resources plan further adds to the overall business plan.

MARKETING PLAN

• What primary and secondary research have you done?
  
  • You must show evidence of having done proper research, both primary and secondary. If you make a statement of fact, you must back it up with properly referenced supporting evidence. If you indicate a claim is based on your own assumptions, you must back this up with a description as to how you came to the conclusion.
    
• Somewhere in your plan have you done an effective analysis of the economic environment relevant to your business?
  
  • It is a given that you must provide some assessment of the economic situation as it relates to your business. For example, you might conclude that the current economic crisis will reduce the potential to export your product and it may make it more difficult to acquire credit with which to operate your business. Of course, conclusions such as these should be matched with your assessment as to how your business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it will take advantage of any opportunities your assessment uncovers.
    
• Somewhere in your plan have you done an effective assessment of the industry within which your venture will operate?
  
  • You must provide an assessment of the industry coupled with descriptions of how your venture will prosper in those circumstances. A common approach used to assess the industry is to apply Porter's (1985) five forces model.
    
  • If you apply the five forces model be certain to do so in the way in which it was meant to be used to avoid significantly reducing its usefulness while also harming the viability of your industry analysis. This model is meant to be used to consider the entire industry – not a subcomponent of it (and it usually cannot be used to analyze a single organization).
    
  • Your competitor analysis might fit within your assessment of the industry, or it might be best as a section within your marketing plan. Usually a fairly detailed description of your competitors is required, including an analysis of their strengths and weaknesses. In some cases your business may have direct and indirect competitors to consider. Be certain to maintain credibility by demonstrating that you fully understand the competitive environment.
    
  • Assessments of the economic conditions and the state of the industry appear incomplete without accompanying appraisals outlining the strategies the organization can/should employ to take advantage of these economic and industry situations. So, depending upon how you have organized your work, it is usually important to couple your appraisal of the economic and industry conditions with accompanying strategies for your venture. This shows the reader that you not only understand the operating environment, but that you have figured out how best to operate your business within that situation. 
• Have you done an effective analysis of your venture (see Organizational Analysis section below)?
  

Completing the marketing plan further adds to the overall business plan.

Primary and secondary data further add to the strength of the business plan.

Providing marketing strategies to capitalize on market information is a winning formula.

Market Analysis

• The market analysis section usually contains customer profiles, constructed through primary and secondary research, for each market targeted. It also contains detailed information on the major product benefits you will deliver to the markets targeted.
  
• describe the methodology used and the relevant results from the primary market research done
  
• if there was little primary research completed, justify why it is acceptable to have done little of this kind of research and/or indicate what will be done and by when
  
• include a complete description of the secondary research conducted and the conclusions reached
  
• Who are your customers going to be?
  
  • Be sure to define your target market in terms of identifiable entities sharing common characteristics. For example, it is not meaningful to indicate you are targeting Canadian universities. It is, however, useful to define your target market as Canadian university students between the ages of 18 and 25 ... or as information technology managers at Canadian universities ... or as student leaders at Canadian universities. Your targeted customer should generally be able to make or significantly influence the buying decision.
    
  • You must usually define your target market prior to describing your marketing mix, including your proposed product line. Sometimes the product descriptions in business plans seem to be at odds with the described target market characteristics. Ensure your defined target market aligns completely with your marketing mix (including product/service description, distribution channels, promotional methods, and pricing). For example, if the target market is defined as Canadian university students between the ages of 18 and 25, the product component of the marketing mix should clearly be something that appeals to this target market.
    
  • Carefully choose how you will target potential customers. Should you target them based on their demographic characteristics, psychographic characteristics, or geographic location?
    
• Do you understand how your targeted customers make their buying decisions? You will need to access research to answer this question. Based on what you discover, you will need to figure out the optimum mix of pricing, distribution, promotions, and product decisions to best appeal to how your targeted customers make their buying decisions.
  

Competition

• The competition section usually fully describes the nature of your competitors. This information might fit instead under the market analysis section.
  
• Describe all your direct competitors
  
• Describe all your indirect competitors
  
• If you can, include a competitor positioning map to show where your product will be positioned relative to competitors' products? Insure that the x-axis and y-axis are meaningful. Often times competitor maps include quality and price as axes. Unless you can clearly articulate the distinction between high quality and low quality, it may be more valuable to have more meaningful axes or describe your value proposition relative to your competitors in the absence of a positioning map.

Figure 6 – Competitor Positioning Map

• What is your competitive advantage? What distinguishes your business from that of your competitors in a way that will ensure your sales forecasts will be met? What is your venture's value proposition?
  
  • You must clearly communicate the answers to these questions in your business plan in order to attract the needed support for your business. One caution is that it may sound appealing to claim you will provide a superior service to the existing competitors, but the only meaningful judge of your success in this regard will be customers. Although it is possible some of your competitors might be complacent in their current way of doing things, it is very unlikely that all your competitors provide an inferior service to that which you will be able to provide.
    

Demonstrating a competitive advantage makes the business plan stronger.

A competitor positioning map provides context as to where your venture fits in the competitive landscape.

Marketing Strategy

• The marketing strategy section is very important as this covers all aspects of the marketing mix including the promotional decisions you have made, product decisions, distribution decisions related to how you will deliver your product to the markets targeted, and pricing decisions.
  
• How do you plan to influence your targeted customers to buy from you (what is the optimum marketing mix, and why is this one better than the alternatives)?
  

Organizational Analysis

• This section might be positioned as a lead-in to your marketing strategy or it might be positioned elsewhere depending upon how your business plan is best structured.
  
• A common approach to analyzing an organization is to apply a SWOT analysis, but ALWAYS ensure this analysis results in more than a simple list of internal strengths and weaknesses and external opportunities and threats. A SWOT analysis should always prove to the reader that there are organizational strategies in place to address each of the weaknesses and threats identified and to leverage each of the strengths and opportunities identified.
  
• An effective way to ensure an effective outcome to your SWOT analysis is to apply a TOWS Matrix approach to develop strategies to take advantage of the identified strengths and opportunities while mitigating the weaknesses and threats. A TOWS Matrix is a tool to help with this. It evaluates each of the identified threats along with each of the weaknesses and then each of the strengths. It does the same with each of the identified opportunities. In this way strategies are developed by considering pairs of factors
  
• The TOWS Matrix is a framework with which to help you organize your thoughts into strategies. Most often you would not label a section of your business plan as a TOWS Matrix. This would not normally add value for the reader. Instead, you should describe the resultant strategies – perhaps while indicating how they were derived from your assessment of the strengths, weaknesses, opportunities, and threats. For example, you could indicate that certain strategies were developed by considering how internal strengths could be employed toward mitigating external threats faced by the business.
  

Product Strategy

• What is your product/service? Why will this particular product/service appeal to your targeted customers better than the alternatives?
  
• If your product or service is standardized, you will need to compete on the basis of something else – like a more appealing price, having a superior location, better branding, or improved service. If you can differentiate your product or service you might be able to compete on the basis of better quality, more features, appealing style, or something else. When describing your product, you should demonstrate that you understand this.
  

Pricing Strategy

• What are your pricing strategies? What makes these strategies better than the alternatives?
  
• If you intend to accept payment by credit card (which is probably a necessity for most companies), you should be aware of the fee you are charged as a percentage of the value of each transaction. If you don't account for this you risk overstating your actual revenues by perhaps one percent or more.
  
• What are your sales forecasts? Why are these realistic?
  
• Sales forecasts must be done on at least a monthly basis if you are using a projected cash flow statement. These must be accompanied by explanations designed to establish their credibility for readers of your business plan. Remember that many readers will initially assume your planned time frames are too long, your revenues are overstated, and you have underestimated your expenses. Well crafted explanations for all of these numbers will help establish credibility.
  

Distribution Strategy

• What are your distribution strategies? What makes these strategies better than the alternatives?
  
• If you plan to use e-commerce, you should include all the costs associated with maintaining a website and accepting payments over the Internet.

Promotions Strategy

• As a new entrant into the market, must you attract your customers away from your competitors they currently buy from or will you be creating new customers for your product or service (i.e. not attracting customers away from your competitors)?
  
  • If you are attracting customers away from competitors, how will these rivals respond to the threat you pose to them?
    
  • If you intend to create new customers, how will you convince them to reallocate their dollars toward your product or service (and away from other things they want to purchase)?
    
• Anticipate the responses competitors will have to your entrance into the market, especially if your success depends upon these businesses losing customers to you. If your entry into the market will not be a threat to direct competitors, it is likely you must convince potential customers to spend their money with you rather than on what they had previously earmarked those dollars toward. In your business plan you must demonstrate an awareness of these issues.
  
• In what ways will you communicate with your targeted customers? When will you communicate with them? What specific messages do you plan to convey to them? How much will this promotions plan cost?
  
• You should consider mapping out your promotional expenditures according to method used and time frame. Consider listing the promotional methods in rows on a spreadsheet with the columns representing weeks or months over probably about 18 months from the time of your first promotional expenditure. This can end up being a schedule that feeds the costs into your projected cash flow statement and from there into your projected income statements.
  
• If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you must go only after you have figured out details like on which days you would like to advertise, at what times on those days, whether you want your print advertisements in color, and what size of print advertisements you want.
  
• Carefully consider which promotional methods you will use. While using a medium like television may initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you think this type of medium might work for you, do a serious cost-benefit analysis to be sure.
  
• Some promotional plans are developed around newspaper ads, promotional pamphlets, printing business cards, and other more obvious mediums of promotion. Be certain to, include the costs of advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens and other promotional client give-always, donating items to charity auctions, printing and mailing client Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it to be useful to join the local chamber of commerce and relevant trade organizations with which to network. Some find that setting a booth up at a trade fair helps launch their business.
  
• If you are concerned you might have missed some of these promotional expenses, or if you want to have a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you should add some discretionary money to your promotional budget. A problem some companies get into is planning out their promotions in advance only to reallocate some of their newspaper advertisement money, for example, toward some of these other surprise purposes resulting in less newspaper advertising than had been intended.

FINANCIAL PLAN

In addition to financial statements, your financial plan should include:

• Various funding options and exit strategies for potential investors
  
• Business valuation (be cautious not to over value your business)
  
• Break-even analysis

Business Valuation

There are a multitude of sophisticated business valuation methodologies. A rule of thumb for business valuations is a multiple of its earnings. For example, if the chosen multiple is five and the business' earnings before taxes are $55M, the business' valuation would be approximately $275M.

Break-even Analysis

Break-Even Point = FC/(P-VC)

• FC = Fixed Costs
  
• P = Unit Price
  
• VC = Variable Cost

Example: If the business' total fixed costs are $1,000,000.00, it costs $5.00 to produce the widget, and the business sells the widget for $7.00, the break-even point is 500,000 widgets.

• It is nearly certain you will need to make monthly cash flow projections from business inception to possibly 3 years out. Your projections will show the months in which the activities shown on your fixed capital and working capital schedules will occur. This is nearly the only way to clearly estimate your working capital needs and, specifically, important things like the times when you will need to draw on or can pay down your operating loans and the months when you will need to take out longer-term loans with which to purchase your fixed assets. Without a tool like this you will be severely handicapped when talking with bankers about your expected needs. They will want to know how large of a line of credit you will need and when you anticipate needing to borrow longer-term money. It is only through doing cash flow projections will you be able to answer these questions. This information is also needed to determine things like the changes to your required loan payments and when you can take owner draws or pay dividends.
  
• Your projected cash flows are also used to develop your projected income statements and balance sheets.
  

Overview

REFERENCES

APPENDICES

List of Items a Business May Need to Purchase

Setup

• Business license
  
• Registration for name, etc.
  
• Domain name registration
  
• Initial product inventory
  
• Signage
  
• All the little things like curtains/blinds, decorations, microwave for staff room, etc.
  
• All the things need to run the business from day #1 (like cutlery, plates, cooking pots, table settings etc. for restaurants ... like towels, soap, etc. for gyms ... like equipment and so on for manufacturing and service places)
  
• Set up and testing of new facilities – new factories and offices do not operate at peak efficiency for some time after startup because it takes time for the new systems to kick into high gear
  
• Professional services needed
  
• Lawyer fees to make sure agreements are solid
• Graphic designer or design company needed to develop visuals
  
• Accounting firm needed to set up initial systems
  
• Insurance – maybe not a direct cost to this one to account for

Office

• Accounting system software
  
• Computer, printer, other things needed like scanner
  
• Office furniture
  
• Initial office supplies – paper, pens, etc.
  
• Telephones
  
• Internet / wifi
  
• Microwave and coffee maker and similar supplies for staff room or coffee room
  
• Bank fees – business banking is normally not free – might also need to have business cheques

Customer Interaction

• Cash register
  
• Loyalty cards / system

Production/operations

• Safety equipment (fire extinguishers, AED)
  
• First aid
  
• Security systems
  
• Equipment maintenance
  
• Janitorial – and cleaning supplies
  
• Bathroom supplies – toilet paper, soap, towels
  
• Membership costs for various associations, including Chamber of Commerce, any professional associations for the relevant industry, etc.
  
• Subscriptions for things like important trade publications, etc.
  
• Shelving and storage systems
  
• Even when not full restaurant, but operations like coffee shops – still require equipment like dishwasher

Training

• Safety – prior to start-up and ongoing and for new employees

Hiring

• Ads, travel expenses – flights, hotels, taxi rides, meal allowances, etc. – to recruit people through interviews, meeting meals, set up with real estate agents, etc.

Promotions

• Website development (complex for e-commerce some capability for email exchanges, leaving comments, etc. ? simple for static information delivery)
  
• Costs for setting up and managing social media (can take a lot of an employee's time)
  
• Grand opening costs

Property

• If buy then include property taxes and all utilities in cash flows and income statement and include building maintenance and maybe build up a reserve fund to pay for things like future roof repairs and needed renovations and upgrades
  
• If rent/lease, then include rental/least cost and whatever utilities are not included in rental/lease payment

Renovations

• Construction
  
• Plumbing
• Electrical
• Utility hookups
  
• Inspections
  
• Shelving
  
• Interior signage
  
• Fencing, parking lot, exterior lighting, other exterior things
  

Risk Management

• Insurance (lots of types – need to choose the types needed)
  
• Training costs
  
• Things like snow removal, deicing sidewalks, etc.

Summary

This chapter described the basic elements of a comprehensive business plan.