Necessary Components of an Effective Business Plan [Part 1-3]
Having to write a business plan is the most important facet of starting a business. Consequently, it’s also the greatest deterrent. Fear not.
WHEN STARTING A BUSINESS, the very first thing you should have is a business plan. The business plan has several purposes. It’s a good way to put ideas on paper and keep track of the steps you’ve taken to start the business.
It’s also a major requirement in acquiring financing for your business.
No one is going to want to give you any money to help you start your business unless you can prove to them that you have a plan to keep your business from crashing down soon after takeoff. Below, you will find a series of sections that make up a basic business plan.
If you already finished this post, here is second part of Necessary Components of an Effective Business Plan
Here’s a tip: The executive summary is most easily and effectively written at the end of your efforts of planning and writing the business plan. Once all of the details of your plan are in order, you will be prepared to condense it into the executive summary. Try to keep this section to fewer than four pages.
Included in the Executive Summary are:
- Mission Statement: The mission statement briefly explains the focus of your business. The statement can be any length as long as the point is conveyed and understood. It should be as direct and to-the-point as possible and it should leave the reader with a clear picture of what your business is all about
- When the business was started
- Key management and their roles
- Number of employees
- Primary location of the business and other satellite locations
- Description of office, manufacturing plant, or facilities
- What are the products or services
- Current investor information and any additional financial relationships or arrangements
- Brief summary of the company’s financial accomplishments and any noteworthy market activities (e.g., your business tripled its value in a one-year period or you became the leader in your industry by developing a certain product)
- Briefly describe management’s plans for the business’ future. With the exception of the Mission Statement, the information located in the Executive Summary should be represented in a brief or bulleted style. Note that this information is expanded upon in greater detail within the remainder of the business plan
To help the reader in pinpointing specific sections within your business plan, provide a table of contents immediately following the executive summary. Be confident that the content titles are very broad; try not to include too much detail.
Within the market analysis, the Industry Description section should include an overview of your primary industry, industry size, current and trailing growth rates, market trends and characteristics relating to the entire industry (for example, what is the life cycle stage of the industry? What is the industry’s expected growth rate?), and include the major customer groups within the industry (This can be as broad or narrow (businesses, governments, women over 35 years of age, children under 5, etc.) depending on the size and scope of the industry and the business represented.
The business’ target market is the customer base that it wants to supply products or provide services to. When defining a target market, it’s vital to narrow the group to a realistic volume. Often, businesses make the fatal miscalculation of trying to offer something to everybody. This approach typically ends in failure.
Within the Target Market section, you should gather information that identifies the following:
- Key characteristics of the primary group you are targeting. This segment should include information about the critical needs of your future customers, the level to which those needs are currently being met, and the demographics of the group. Ensure you also include the geographic location of your target market; identify the key decision-makers, and any seasonal or cyclical trends that may impact the industry or your business model.
- Size of the target market. Herein, you will need to know the amount of available customers in your primary market, the amount of annual purchases they make relative to products or services at par with your own, the geographic area they inhabit, and the expected market growth for this group.
- The magnitude to which your business expects to obtain market-share and the reasons why. When gathering this information, you need to decide how much market share and how many customers you expect to gain in a specific geographic region. In addition, you should provide the reader with an understanding of the reasoning that was used in developing these estimates.
- Pricing and gross margin expectations. In this section, it would be wise to define the structure of your pricing, your gross margin requirements, and any discounts or incentives that you plan to offer through the business, such as large-volume purchasing, bulk discounts, or prompt payment discounts that discourage customers from taking advantage of payment terms.
- Target market research and information sources. These resources could be purchased demographic research, directories, business associations, industry publications, and government documents.
- Media the business will use to reach the target audience. The media may include internet marketing, internet radio, terrestrial radio, television, magazines, periodicals, or any other type of engaging media that has potential interaction with the target audience.
- Buying patterns of your target market. The first step is to identify the needs of the potential consumers, conduct research in order to address their needs, review the possibilities, and identify the person or persons that can select the most effective solution.
- Trends that affect the potential customers, coupled with fundamental features of the subsequent markets. As with the primary target market, it is important to pinpoint the needs, demographics and developing trends that are going to affect the secondary markets later.
Lead-time is the required amount of time from when a customer places an order until the moment the product or service is delivered. When you research this information, determine your lead-times regarding initial orders, re-orders, and bulk purchases.
While conducting a competitive analysis (SWOT Analysis) it is critical to identify the competition’s product-lines or services and market segment. Use this information to determine their strengths and weaknesses, understand the relationship between your target market and your competitors, and identify any roadblocks that may interfere with you entering the marketplace. Also, be certain that you identify all of the primary competitors for each of the products or services offered. For each key competitor, determine their market share; try to predict when new competitors will enter into the marketplace. In fewer words, how long will your window of opportunity last? Finally, pinpoint any additional or less impactful competitors that may have an effect on your business succeeding.
The strengths or competitive advantages realized by your competition’s organization can become advantages that you too provide. These strengths can be found in many different areas of the business. They typically include:
- An ability to service the customers needs
- The holding of a great deal of market share (consumer’s brand awareness comes with that)
- Years in business as a trusted organization
- Great financial position, ensuring that they can survive as a business through thick-and-thin
- Exceptional management or personnel
In the event that target audience is not shared by your competition, you should be able to grow your idea with little resistance. However, if the competition is hungry for your target market, too, you should plan to handle the known roadblocks on your way to success. Some issues you may uncover include:
- Large start-up costs
- Time required to get your idea off the ground may be significant
- Constantly evolving technologies
- Shortage of skillful personnel
- Customers are unfamiliar with your company, product or service
- Current intellectual property laws such as trademarks, patents and trademarks inhibit your ability to innovate
Fundamental factors of success typically include an ability to satisfy your customers’ needs better than the competition, time and cost-effective processes of providing products or services, valuable personnel, and quite often, a prime location. Any, or all, of these provides businesses a competitive advantage.