Business Plan Basics

So your dreams of becoming a tiki bar owner are finally coming true. You've built your hut, settled on a name, picked out bamboo barstools and are now hiring a staff. You've got a to-do list that's longer than a rush-hour traffic jam.

Why take the time to write a business plan now?

Because regardless of whether you're launching a local watering hole or a sophisticated computer consulting firm, without a good business plan you're not really in business, says Joseph Hadzima, a senior lecturer at MIT's Entrepreneurship Center. You might think a business plan is something of an academic exercise, a formality that's necessary only if you're trying to round up outside funding. That's certainly one reason why you need a business plan — but it's not the most important one, he says.

Assembling a business plan forces an entrepreneur to think hard about the core aspects of a business — its value to customers, its competition, and the factors that will affect its financial performance over the long haul. In other words, even if a business idea seems like a winner at first, writing up a good plan might help an entrepreneur sort out for himself whether the business has a real shot at survival. And ultimately, a good, flexible plan can help the owner manage the business once it gets off the ground.

While there's no set way to write a business plan, most of them follow a similar formula. At a minimum, business plans typically include four elements: an executive summary, a market analysis, a detailed company description along with strategies and timelines, and financials. Here are some tips to get you started with each.

The Executive Summary: Your Business...In a Nutshell.

A business plan is basically a sales pitch — especially its opening statement, the executive summary. As an entrepreneur, you probably make pitches all the time — to partners, prospective employees, skeptical investors, suppliers, vendors and, of course, customers. ("Good entrepreneurs are basically salespeople," says Hadzima. "You're always selling something.") While you wouldn't want to make the same pitch to everyone you deal with, they'd probably all be interested to hear a concise overview of the company — its history, its unique aspects, its long- and short-term goals. That's exactly what you'll serve up in the executive summary.

An executive summary can be one paragraph or a few paragraphs long, and although it comes first in the lineup, it might be the last thing you write. It's meant to be a concise roundup of the major points you'll make in the rest of the plan. Some things to consider include: the company's mission statement; the names of the founders and the date they founded the business; a description of the main products or services you'll be selling; a summary of financials or market data; and plans for the future.

Because the executive summary is like a resume — it's the catchy, concise opening volley that gets people interested — it must absolutely dazzle. You must emphasize your particular skills for running this type of business, and why now is the best time to start it. Hadzima likens the executive summary to a job application, or even an "elevator pitch" — so named because, when visiting a venture-capital firm, an entrepreneur might have just the span of a quick elevator ride to pitch a business idea to venture capitalists. (There's now a business-plan competition called the Elevator Pitch).

The Market Analysis: Time to Size Up the Competition

A business plan must include a "market analysis," or a look at the size and scope of the audience you'll be targeting and the companies that are already filling that niche. Even if you've invented what you believe to be a new product, it's never a good idea to claim that you don't have any competition, says Tim Berry, an adjunct professor at the University of Oregon and the president of Palo Alto Software, a company that develops software products to help people write business plans. Claiming no competition usually means you haven't done your homework.

Try to estimate the number of customers you would have based on how many your competition has. Some questions to answer: Who already buys similar products? What kinds of companies produce them? Will some people who currently use the other product switch to yours? Will your product be appealing to people of a certain age, gender or geographic region?

The formal name for all this figuring is called market research, and it doesn't take an MBA to conduct it, says Berry. Of course, if you have the money, you can hire a market-research firm to gather the information for you. But you can usually kick it off with a few phone calls or some Web research. If you're competing against local businesses, chances are you know the tastes, values and buying habits of people in your area better than outsiders might.

Hadzima says you shouldn't be intimidated if, after taking a look at potential competitors, you see a crowd of companies, large or small. "Competition is usually a good sign," he says. "It validates that there's a market for what you want to be selling.

For an example of good market analysis, check out the way this health club — which planned to launch gyms in corporate environments — sized up both the fitness market and its specific competition.

Company Description & Strategies: The More Details, the Better

The best business plans aren't full of airy dreams. They're chock full of specifics, says Berry. A good plan will include a concrete description of the firm, the product or service it offers, along with details on staffing and ongoing projects (along with completion dates). For example, will a prototype of the product be ready for a big trade show in June? Will sales hit a certain figure before you can implement new marketing strategies?

If there are a handful of people on your team, this part of the business plan can serve to make sure everyone is on the same page. It's also important to let everyone — including outside advisers — know that you're open to their input, says Hadzima. "The smart entrepreneur is constantly scanning the landscape, talking to customers, probing assumptions," he says. "You don't go into a room, seal the doors and create a business plan. It's a very collaborative project."

Financial Projections: Be Realistic

Naturally, a business plan needs to include some financial information. But be warned: An all-too-common mistake for enthusiastic entrepreneurs is to project astronomically high revenues. Anticipating that you'll be raking in cash within in a few months after you kick off your business is a good way to disappoint yourself and others, says Berry. So be conservative.

Professional investors, who see pie-in-the-sky financial figures all the time, will automatically be skeptical if your figures seem too optimistic. More impressive is the plan that outlines the financial risks you face, says Hadzima. Explaining the potential pitfalls upfront will help you build credibility with partners and investors, and you'll find that you're less likely to be on the defensive all the time.

Bleak as it sounds, you should start mapping out your financials by overestimating startup costs and underestimating initial revenue figures, says Eric van Merkensteijn, a Wharton professor of entrepreneurship who, in the late 1990s, left academia to put his entrepreneurial theories to work by opening van M's Music Bar & Grille in Philadelphia. "Take what you believe will be your upfront investment cost, then double that number, then double it again," says the embattled restaurateur who closed van M's (renamed the M Lounge) in 2004 and returned to academia, via UPenn's Center for Organizational Dynamics. "Only then will you have a number that's somewhat realistic."

You're Done! Now Prepare to Revise

A business plan is just that — a plan. It's not a contract, and the sky won't fall if you happen to be slightly off, or even way off, in your calculations. If you've been thoughtful in your market analysis and conservative about financial projections, your business might beat your initial expectations. But if it doesn't, says Berry, it's not necessarily a sign that you should throw up your hands and flee the business world.

Instead, consider your business plan a constantly evolving document. Update it regularly to reflect changes in your goals and expectations. If you're still focused on meeting certain key dates, like a break-even point, or a certain number of initial sales, it's a good idea to know how far away you still are from that goal so you can adjust your funding accordingly.

Be patient. Nobody says launching a successful small business is easy. Consider the creation of your business plan just one small step on your journey to moguldom. © 2007 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & Company, Inc. and Hearst SM Partnership. SmartMoney is a registered trademark. All Rights Reserved.

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