How to prepare an effective business plan

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Preparing a business plan can be a challenging and time-consuming process. However, it is worth the effort because when done correctly it achieves three key objectives:

  • It forces you to confront some hard and perhaps uncomfortable facts about your business.
  • It aligns the senior management team regarding actions that must be taken to reach the desired outcomes.
  • When done correctly, it can serve as a sales document for your company.

Keep in mind that your business plan must be tailored to a specific audience. Broadly speaking, there are three main audiences for business plans: (a) employees, (b) business partners/senior management, and (c) potential investors. Each group is looking for something specific from the plan.

Employees generally want an update on how the business is doing so they can get a sense of their prospects for ongoing employment, promotions, bonuses, and so on. Your goal is essentially to share information and paint a picture of the future of your company, and you’re not looking for any approvals from this group.

When you are preparing a business plan for business partners or senior management, you are normally trying to achieve two goals: (a) give an account of your stewardship, and (b) seek their alignment and approvals on future plans and investments.

Preparing a business plan for potential investors is more challenging, because not only do you need to share your future plans but you must also explain what your business does, what competitive advantages you enjoy, and why your company would be a good investment. The rest of this article will focus on the key aspects of preparing a business plan for potential investors.

First of all, you must strive for clarity and brevity. Venture capitalists and other investors are inundated with investment proposals, and they don’t have the time or patience to work their way through 100 pages of rambling data points and comments in an attempt to understand what your business proposal is all about. The plan you present must be well thought out, concise, logical, and easy to understand. Remember that you probably will not be present to walk them through the initial presentation, so your plan will have to do all the talking for you.

This brings us to the single most important section of the business plan: the Executive Summary. In many cases this is the only section that gets read. If people don’t find the executive summary interesting and compelling, then there is a high probability they will read no further.

What should you include in the executive summary?

The executive summary should contain a brief description of what your company does, who your key customers are, what your value proposition is, and how you make money. Because your business plan is targeted to investors, you also need to be very clear about what you are asking for and how you plan to spend the money. Because this section is so important, you should wait until you have completed all the other sections before preparing it, as you’ll find it easier to summarize the key points at that stage. Length is also important, and you should try to limit the executive summary to anywhere between a half-page and one full page.

Because each company is different, each business plan will have unique elements. However, a good business plan should contain most of the following elements:

  • It should explain in simple terms your business proposition. A good way to do this is to explain what problem your business solves. This may sound a little strange, but if you didn’t solve a problem then why would anyone need your product or service? As part of this section you should explain who your key customers are and why your product or service has an advantage over the offerings of your competitors. If you do a good job on this section the reader should be thinking “Who would ever have thought this was such a big problem, and why hasn’t anyone come up with a solution until now?”
  • It should quantify the potential size of the market. Here you should talk about the current market, how you see it growing, and the current state of your competition. It’s important that you be realistic, and above all don’t simply dismiss the competition as being irrelevant. It’s perfectly acceptable to talk about risks and opportunities and the impact of competitors; indeed, if you fail to do this you run the risk of being considered naive. Remember, especially if you are a startup, that most small businesses fail not because they have a poor product offering but because they encounter problems that they did not anticipate.
  • The plan should paint a long-term picture of what the business will look like in five years, and it should also specify short-term deliverables that will be executed in the next two to three years.
  • Your business plan should contain a finance section with a P&L, Cash Flow Statement, and ideally a Balance Sheet. I normally recommend limiting the forecast period to three to five years, as anything beyond that is of questionable value. The cash flow statement not only shows how the investors’ funds will be spent but also addresses the issue of working capital, which is a major problem for many startups. If you are an existing business, then it’s also necessary to show historic data, but again I’d limit this to two to three years.
  • The plan should include a section describing the management team that is going to execute the plan and their relevant background and experience. Many investors view the strength of the management team as a key indicator of whether the business will succeed. Remember that it’s one thing to have a good idea but another thing entirely to be able to bring it to fruition, especially if you are dealing in an emerging market.

Finally, here are some pitfalls to watch out for when preparing your business plan:

  • Avoid being overly focused on the technology behind your product. Many plans I’ve seen are virtually devoted to explaining how wonderful the product is and why it’s so much better than the competitors’ products. Keep in mind that the analyst reading your plan is unlikely to be an expert in your area, so devoting the plan to a technology discussion is a mistake. Focus instead on what problem you solve and why the customer will be attracted to your product versus the competition’s.
  • Beware of what I call the “Colgate Plan,” where a company thought that when they entered China all they needed to do was sell just one toothbrush to a small portion of the population and they’d make a killing. It’s easy to identify a huge market, but it’s much more challenging to devise and execute a business plan to capture that opportunity
  • Avoid P&L projections that essentially take a “hockey stick” approach, forecasting heavy losses for the first two to three years and then miraculously predicting substantial profits in Year 4. In my experience such predictions never materialize, and people are unable to articulate precisely what will happen in Year 4 to drive the turnaround. Remember that your plan must be “believable,” and if there is a major swing from year to year you must be able to explain what drives it.
  • Lastly, avoid overselling the expertise of the management team. Many plans devote so much time to explaining the qualifications and research experience of the team that they seem to be adopting the view that with such a team how could the company fail? Unfortunately, technical qualifications are no guarantee of success, so it’s much better to explain the critical success factors that are necessary to succeed in your business and then describe how you plan to deliver against them.

 

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