How to write an effective business plan

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June 13, 2010

How to write an effective business plan

If your business is all in your head, it's hard to convince lenders, investors and shareholders that you have a credible company and that you'll use their funding well. And that's precisely where a business plan comes in. This highly recognized management tool is basically a written document that describes who you are, what you plan to achieve, how you plan to overcome the risks involved and provide the returns anticipated. Often people think of business plans are limited to starting up new companies or applying for business loans. However, they are also essential to running a business with a clear, well-documented plan.

Make it thorough but keep it simple

Many entrepreneurs may see putting a business plan together as a daunting task involving hundreds of pages. However, in reality, it should be a concise and structured document that gives readers everything they need to assess your company's project. There's no one guaranteed formula for writing an effective business plan. However, in general you have to show that you're committed to your venture and that you have the expertise, skills and self-confidence necessary to make it all happen.

Here's the core content that you should consider.

Your business proposal

Include a description of exactly what you're proposing. Ask yourself: who your customer is, what business are you in exactly, what do you sell, and what are your plans for growth?

Your unique selling point

Address how your goods or services will appeal to customers. How will your company or product/service make a difference in the lives of your customers?

Market analysis

Make sure you show your lender that you've done your homework. Basically, your market research helps you understand your customer needs so that you can offer a product or service that precisely fits those needs. You'll need to provide information such as your target market, customer demographics, competition and distribution methods.

Key competitive information

Provide information on competitor weaknesses and strengths and show how you intend to improve on what they're doing.

Organizational structure

Use organization charts to clearly spell out the roles of key management people and the proposed size of your organization.

HR requirements

You should include information on how you plan to recruit and maintain your employees or handle outsourced work.

Premises and capital goods

Do an assessment of the company's needs with regard to premises and capital goods (such as machinery, technological equipment).

Key financial data

Be sure to modify your information depending on your target audience. For example, your bank will be interested in how you intend to repay the loan or overdraft, what you intend to do with the money and how it will help your business grow. Potential investors will also want to see the expected return and sources of funding, while shareholders are looking for the prospect of the share price and what dividend they can expect on their shares. Generally, lenders, shareholders and investors want facts and figures that back up what you say.

  • Show your personal and business net worth (assets minus liabilities) so the lender can judge your ability to repay your debt.
  • A banker will also look at your past credit history to gauge your reliability. Be sure that you know what credit agencies have on file about you or your company.
  • Include your assets, such as collateral to secure a loan. Bankers invariably ask for some investment on your part as proof of commitment. (This investment may have been raised by you privately or through family and friends). The rule of thumb is that money attracts money; the more backers you have, the easier it is to attract new ones.
  • Be sure you include your cash flow forecast, which is the amount of cash needed to run your business: technology, inventory, equipment, human resources, etc.
  • Present financial projections for at least 2 years and do an analysis of market size and market potential.
  • Show implementation details or exactly what will make all of this happen. You need to assign clear responsibilities, set real dates and realistic budgets. Include your financial control systems, such as stock planning and managing debtors and creditors.

Legal structure

Address issues such as taxes, liability concerns, information on proprietorships, partnerships, limited or incorporated companies. If you're buying an existing business, be sure to clarify buy-and-sell agreements. Keep in mind that you should have a lawyer look over all contracts and legal issues.

An executive summary

It helps to write this last; a page or two of highlights is sufficient. Be sure to clarify whether this is a new business venture, an expansion of an existing business or the purchase of a new business.

You should also include:

  • The type of business activity
  • Your unique selling point
  • The market to be served
  • The main objectives of your company
  • Management background
  • Project timeframes involved

Avoid these pitfalls

  • Being overly ambitious—you should be able to justify any assumptions or projections.
  • Masking financial difficulties: inform your lender if your sales fluctuate, for example, and you may prefer a flexible payment schedule. A transparent business plan is one of your best assets in gaining the trust of bankers and investors, whether they are your associates or people outside the company.
  • Providing inadequate information on the management team, flawed marketing plans, unrealistic forecasts or incomplete presentations.

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