A business plan is a roadmap for business success. This document generally projects 3-5 years ahead and outlines what path the business is taking to be viable and successful.
The executive summary is often considered the most important section of a business plan. This section briefly tells your reader where your company is, where you want to take it, and why your business idea will be successful.
The executive summary should highlight the strengths of your overall plan and therefore be the last section you write. However, it usually appears first in your business plan document.
What to Include in Your Executive Summary:
If you are an established business, be sure to include the following information:
• The Mission Statement – This explains what your business is all about.
• Company Information – Include a short statement that covers when your business was formed, the names of the founders and their roles, your number of employees, and your business location(s).
• Growth Highlights – Include examples of company growth, such as financial or market highlights
• Your Products/Services -- Briefly describe the products or services you provide.
• Financial Information – If you are seeking financing, include any information about your current bank debt and private investor debt.
• Summary of future plans – Explain where you see your business in the future.
If you are just starting a business, you won't have as much information as an established company. Focus on your experience and background and the decisions that led you to start this particular enterprise. Convince the reader that you can succeed in your target market.
This section of your business plan provides a high-level overview of the different elements of your business.
What to Include in Your Company Description
• Describe the nature of your business and list the target marketplace.
• Explain how your products and services meet the needs of the target marketplace.
• List the specific consumers, organizations or businesses that your company serves or will serve.
• Explain the competitive advantages that you believe will make your business a success
The market analysis section of your business plan should illustrate your industry and market knowledge as well as any of your research findings and conclusions.
What to Include in Your Market Analysis
Industry Description and Outlook – Describe your industry, including its current size and historic growth rate as well as other trends and characteristics
Information About Your Target Market – Narrow your target market to a manageable size.
Distinguishing characteristics – What are the critical needs of your potential customers? Are those needs being met? What are the demographics of the group and where are they located? Are there any seasonal purchasing trends that may impact your business?
Size of the primary target market – In addition to the size of your market, what data can you include about the annual purchases your market makes in your industry? What is the forecasted market growth for this group?
Pricing and gross margin targets – Define your pricing structure, gross margin levels, and any discount that you plan to use.
Competitive Analysis – Identify your competition by product line or service and market segment. Assess the following characteristics of the competition:
1. Market share
2. Strengths and weaknesses
3. How important is your target market to your competitors?
4. Are there any barriers that may be an obstacle as you enter the market?
5. What is your opportunity to enter the market?
6. Are there any indirect competitors who may impact your success?
7. What barriers to market are there?
Regulatory Restrictions – Include any customer or governmental regulatory requirements affecting your business, and how you’ll meet these requirements.
Organization & Management
The Organization and Management section should include: your company's organizational structure, details about the ownership of your company, profiles of your management team, and the qualifications of your board of directors. Give a detailed description of each division or department and its function.
A simple way to explain the structure of your company is to create an organizational chart with a description
This section should also include the legal structure of your business. Have you incorporated your business? If so, what type? Is it a partnership? Is it a sole proprietorship?
The following ownership information should be incorporated into your business plan:
• Names of owners
• Percentage ownership
• Extent of involvement with the company
• Management Profiles
• One of the strongest factors for success in any growth company is the ability and track record of its owner/management team. Provide resumes that include the following information:
• Primary responsibilities and authority
• Unique experience and skills
• Prior employment
• Special skills
• Past track record
• Industry recognition
• Community involvement
• Number of years with company
Service or Product Line
The next part of your business plan is where you describe your service or product. Focus on why your particular product will fill a need for your target customers.
What to Include in Your Service or Product Line Section
- A Description of Your Product / Service
- Include information about the specific benefits of your product or service – from your customers' perspective.
- Details about Your Product’s Life Cycle
- Be sure to include information about where your product or service is in its life cycle.
If you have any existing, pending, or any anticipated copyright or patent filings, list them here. Include any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
Ask yourself the following questions to determine your financing needs:
Do you need more capital or can you manage the existing cash flow? If you are having trouble paying your obligations on time, you may need an infusion of working capital.
What is the nature of your need?
Do you need money to start or expand your business or as working capital?
What is the urgency of your need?
How great are your risks? All businesses carry risk, and the degree of risk will affect both the cost of your loan and available financing options.
For what purposes will the working capital be used? The lender will need to know your specific intentions for the money, to assure themselves that your business will thrive and that repayment is assured.
How strong is your management team? Your lender will be looking for a strong managerial presence.
What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries, such as construction, are designed to support a business through depressed periods.
How does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your business plan for the start-up and growth of your business.
Financial statements have a value that goes far beyond preparing tax returns or applying for loans.
Below you will find information on the primary financial statements: the balance sheet and the income statement.
The balance sheet is a snapshot of your business financials. It includes assets, liabilities and net worth. The "bottom line" of a balance sheet must always include (assets = liabilities + net worth).
Liabilities and net worth on the balance sheet represent sources of funds. Liabilities and net worth report the creditors and investors who have provided cash or its equivalent to your business. As a source of funds, they enable your business to continue operations.
Assets represent the use of funds. A business uses cash or other funds provided by the creditor/investor to acquire assets. Assets include things of value that are owned or due to a business.
Liabilities represent obligations to creditors while net worth represents the owner's investment in the business.
Anything of value that is owned or due to the business is included under the Asset section of a Balance Sheet.
Current assets mature in less than one year. They are the sum of:
- Accounts Receivable (A/R)
- Notes Receivable (N/R)
- Other current assets
Cash: Cash pays bills and obligations. Inventory, receivables, land, building, machinery and equipment do not pay obligations even though they can be sold for cash and then used to pay bills. Cash includes all checking, money market and short-term savings accounts.
Accounts Receivable (A/R): Accounts receivable are dollars due from customers. Inventory is sold and shipped, an invoice is sent to the customer, and cash is collected at later time. The receivable exists for the time period between the selling of the inventory and the receipt of cash. Receivables are proportional to sales.
Inventory: Inventory consists of the goods and materials a business purchases to resell at a profit. In the process, sales and receivables are generated. The business purchases raw material inventory that is processed (called work-in-process inventory) to be sold as finished goods inventory.
Notes Receivable (N/R): N/R is due to the business as a result of the business making a loan, such as a promissory note. Notes receivable is usually a claim due from one of three sources: customers, employees or officers of the business.
- Customer notes receivable is when the customer who borrowed from the business when the customer failed to pay the invoice according to the agreed-upon payment terms. The customer's obligation may have been converted to a promissory note.
- Employee notes receivable may be for legitimate reasons, such as a down payment on a home, but the business is neither a charity nor a bank. If the business wants to help an employee, it can co-sign on a loan advanced by a bank.
- An officer or owner borrowing from the business is the worst form of note receivable. If an officer takes money from the business, it should be declared as a dividend or withdrawal and reflected as a reduction in net worth. Treating it in any other way leads to possible manipulation of the business's stated net worth. Banks and other lending institutions often condemn this practice.
Other Current Assets: Other current assets consist of prepaid expenses, other miscellaneous and current assets.
Fixed assets represent the use of cash to purchase physical assets whose life exceeds one year, such as:
- Machinery and equipment
- Furniture and fixtures
- Leasehold improvements
Intangibles are assets with an undetermined life that may never mature into cash. Intangibles consist of assets such as:
- Research and development
- Market research
- Organizational expense
Other assets consist of miscellaneous accounts, such as deposits and long-term notes receivable from third parties. They are turned into cash when the asset is sold or when the note is repaid.
Total Assets represent the sum of all the assets owned by or due to a business
Liabilities and Net Worth
Liabilities and net worth are sources of cash listed in descending order from the most nervous creditors and soonest to mature obligations (current liabilities), to the least nervous and never due obligations (net worth).
There are two sources of funds: lender-investor and owner-investor. Lender-investor funds consist of trade suppliers, employees, tax authorities and financial institutions. Owner-investor funds consist of stockholders and principals who loan cash to the business.
Current liabilities are obligations that will mature and must be paid within 12 months. These are liabilities that can create a business's insolvency if cash is inadequate.
Current liabilities consist of the following obligation accounts:
- Accounts Payable (A/P)
- Accrued expenses
- Notes Payable (N/P)
- Current portion of Long-Term Debt (LTD)
Proper matching of sources and uses of funds requires that short-term (current) liabilities must be used only to purchase short-term assets (inventory and receivables).
Accounts Payable (A/P): Accounts payable are obligations due to trade suppliers who have provided inventory, goods or services used in operating the business.
Accrued Expenses: Accrued expenses are obligations owed, but not billed such as wages and payroll taxes, or obligations accruing.
Accruals include wages, payroll taxes, interest payable and employee benefits accruals such as pension funds.
Notes Payable (N/P): Notes payable are obligations in the form of promissory notes with short-term maturity dates of less than 12 months. Often, they are payable upon demand. Notes payable include only the principal amount of the debt. Any interest owed is listed under accruals.
Non-current liabilities are those obligations that will be payable in the following year. There are three types of non-current liabilities, only two of which are listed on the balance sheet:
- Non-current portion of Long-Term Debt (LTD)
- Notes Payable to Officers, Shareholders, or Owners
- Contingent Liabilities
Non-current portion of long-term debt is the principal portion of a term loan not payable in the coming year. Subordinated officer loans are treated as an item that lies between debt and equity. Contingent liabilities listed in the footnotes are potential liabilities, which hopefully never become due.
Non-current Portion of Long-Term Debt (LTD): is the portion of a term loan that is not due within the next 12 months. It is listed below the current liability section to demonstrate that the loan does not have to be fully liquidated in the coming year. LTD provides cash to be used for a long-term asset purchase, either permanent working capital or fixed assets.
Notes Payable to Officers, Shareholder or Owners: represent cash that the shareholders or owners have put into the business. For tax reasons, owners may increase their equity investment beyond the initial business capitalization by making loans to the business rather than purchasing additional stock. Any return on investment to the owners can therefore be paid as tax-deductible interest expense rather than as non-tax-deductible dividends.
Contingent Liabilities: are potential liabilities that are not listed on the balance sheet. They are listed in the footnotes because they may never become due and payable. Contingent liabilities include lawsuits, warranties and cross Guarantees.
Total Liabilities: represent the sum of all monetary obligations of a business and claims creditors have on its assets
Equity is represented by total assets minus total liabilities. Equity or Net Worth is the most patient and last to mature source of funds. It represents the owners' share in the financing of all the assets.
The income statement, also known as the profit and loss statement, includes all income and expense accounts over a period of time. This financial statement shows how much money the business will make after all expenses are accounted for. An income statement does not reveal hidden problems, like insufficient cash flow. Income statements are read from top to bottom and represent earnings and expenses over a period of time.
SCORE offers several helpful templates:
Starting a business can be a hardship on your personal finances. Before starting a business, it is important to get your finances in order.
To get started, write a monthly household budget that accounts for your income and your household expenses. Be conservative and trim household expenses down to only needs.
It is also important to check your personal credit history. Personal credit history is a main driving force in obtaining financing for a new business.
Start Up Expenses
If you are planning to start a business, determine your budgetary needs.
To determine how much seed money you need to start, you must estimate the costs of doing business for the first months. Some of these expenses will be one-time start-up costs. Some will be ongoing costs, such as the cost of utilities, inventory, insurance, etc.
A realistic startup budget should only include those things that are necessary to start a business.
These essential expenses can be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.
Managerial expertise is critical in the success of any business. Poor management is the most frequent reason businesses fail. Lenders will be looking closely at your industry experience as well as that of your key managers.