Do you need a business plan to get funding from investors or a bank loan? If YES, here are 7 beginner steps to writing a detailed business plan for a small startup.
In these times of financial uncertainty, financial gurus have been steadily spreading the gospel that starting a business, no matter how small, is the only sure route to financial stability. Having thought out a suitable business, the only sure route to business success, especially for those intending to seek for business funding, is to write a plan for your business.
What is a Business Plan?
A business plan can be defined as a document that describes in great detail how a business is going to achieve its goals. This plan is essentially a map that shows an entrepreneur how to build up a viable business.
A good business plan usually contains the executive summary of the business, an overview of the industry the business will be a part of, the problems identified that needs solving, its services and/or products, how the business intends to achieve its goals and how it will distinguish itself from its potential competitors etc.
For one who is writing a business plan which he intends to use to get funding from investors, the business plan should contain details like; financial projections, target market, exit strategy, etc.
Even though a business plan has to contain a lot of business specifics so as to provide great detail for investors, but it should be noted that the plan should never be voluminous as you risk losing it to the trash can. Try as much as possible to fit in the details in at most 20 pages or less so that it can be readable because investors are always very busy people who have no time to pore over irrelevant words.
Even if you are not soliciting funding from an investor, you still need to write a business plan for your business because a business plan allows you to identify potential problems and opportunities your business might encounter, it would help you avoid penalties, fines or other legal problems, help you adapt to changes in the marketplace and let you expand or contract from a position of objectivity.
Other benefits of a business plan include;
Benefits of a Business Plan to an Entrepreneur
- Aids in obtaining funding: A thorough business plan will increase your chances of obtaining venture capital and bank loans.
- Aids in managing cash flow: Outlining a cash flow plan is a great way to make educated guesses on sales, costs, expenses, assets you need to buy and debts you have to pay. It would also help you manage your available cash effectively.
- Sets Milestones: Good business planning helps the business to sets milestones it can work towards achieving at a particular time frame.
- Minimize Legal Problems: you will definitely need to procure certain licenses or permits to operate your business. You would need to arrange for taxes, incorporate the business etc. All these modalities are listed in the business plan so you don’t forget any one of them and incur penalties for yourself.
- Set priorities: a good business plan would help you to keep track of the most important things. It would help you allocate your time, effort, and resources strategically and effectively.
- Provide exit strategy: In addition to providing benchmarks for success, a good business plan sets realistic criteria for shutting down the business to prevent you losing at both ends.
4 Beginner Tips to Writing a Simple Business Plan for Funding
a. Fine tune your executive summary: You have to keep in mind that you are not the only one who needs funding for a business. Because of the sheer number of people seeking funding, bankers and professional investors do receive so many business plans.
In order to be able to go through all of them, they sometimes go right to the executive summary for an overall view of what your plan is all about. You have to make sure that your executive summary contains all the details of your business plan in such a way that one can know everything about your business from the executive summary alone.
b. Ensure that your business plan has all the necessary sections: You would be surprised at how many business plans are submitted with important data missing. You need to check, and check again to make sure all the important components are included when you are done with writing. Even when using business plan software, people skip sections or decide an area isn’t important. Leave nothing to chance. A well-written and complete business plan gives you a higher chance of success and better odds of getting the financing you are seeking.
c. Know your business inside out: While the business plan should have all the answers, investors, bankers and venture capitalists are shrewd and ask questions that may not be answered in the plan. Be ready to answer anything they can possibly throw at you.
d. Know your audience: you need to know who you want to present the business plan to and write accordingly to suit them. You need to use the language your audience will understand, and avoid using excessive jargon. You can always use the appendix of your plan to provide more specific details.
How to Write a Detailed Business Plan to Get Funding from Investors or Bankers
Having known what a business plan is and its uses, let’s go ahead to provide specifics of what should be included in the business if the entrepreneur wishes to get external funding.
When writing a business plan that is to be presented to investors, certain things should be made priority while others can be given minimal emphasis or left out altogether. Here is what your business plan should look like if you want it to be effective.
- Executive summary
The executive summary is a very important plan of a business plan that is targeted at investors. It has already been said this part of the plan should be detailed so as to attract whoever that is reading it. Your executive summary should represent an overview of your business and your plans. It comes first in the plan and is ideally only one to two pages.
The executive summary is an introduction to the main ideas that you will discuss in the rest of the plan. If an investor reads only the executive summary and nothing else, they should be able to have a clear understanding of the main highlights of your business and if or why it should get funding.
A good executive summary includes quick overviews of the mission statement, product/service summary, market opportunity summary, traction summary, next steps, and vision statement etc.
It should be noted that although the executive summary comes first, it is often beneficial to write it last because you would have tidied up the business details by then and thus know what needs to be included and what should not.
- Opportunity that requires investment
The investment opportunity section is where you tell investors what your goals are, how you intend to achieve those goals, why the investors should make funds available to help you achieve those goals, and what they have to gain from getting involved with your company. The section would also include how much you need to move forward, how you plan to use those funds, and what you will be able to achieve with their investment.
- Your business Team
One of the things that woo investors to a business is the team they have working for them. This section of the business plan should be utilized to describe your current team, who you need to hire and what their roles would be. You have to be able to convince your reader that not only that your team is the right team for the job, but that they are the only team for the job.
For this to be believed, you need to create a bio for each member of the team and each of their bio should include: the team member’s name; their title and position at the company; their professional background; any special skills they have developed as a result of their past experience; their role and responsibilities at your company; and what makes them uniquely qualified to take that role on.
You should endavour not to make this lengthy so as not to get boring. About three to five concise sentences on each team member would do.
- Market opportunity
In order to bring out opportunities that exist in the market for your business, you have to enumerate the problems that need solving, or inconveniences that need to be eliminated. A good market opportunity section addresses two key points:
The problem that your product/service solves, and the industry trends that make now the time for your company to succeed. This section basically answers the question of WHY. You should equally include recent trends that have been noticed in the market and how they would influence or affect your business.
And to sum it all up, write a conclusion that answers this question: How do the problems customers face and the trends that are happening come together to create the perfect environment for your company to succeed?
- Target audience
The target audience section is where you show readers that you know who your audiences are, where they can be found, and what is important to them.
You equally have to enumerate the people that your product/service is designed to appeal to, consider what your customers’ demographic are, if your target audience is made up of more male or more female, what age range your target customers fall into, the number of people in your target demographic, where your target customers live, how much money they make, their priorities or concerns when it comes to the products/services they buy, etc.
- Revenue generation
In this section, you would have to provide facts on how your company intends to make money. You need to identify all current/initial revenue sources, including pricing, COG, and margins.
You should equally provide details of your pricing model and what informed the price you would be offering. Indicate also how your price compares to that of your competitors, if there is any additional revenue source you plan to add down the line, and how you intend to start generating revenue if you haven’t started already.
- Competitive Analysis
In this section, you are required to identify your competitors and their key strengths and weaknesses. You also need to identify your competitive advantages, that is, why you can be more successful than the others. This essentially means how your product/service is different from the others in the market and how those differences will help you to maintain your strategic edge. Ask yourself: What are the key differentiators between your company and other companies out there? How will these advantages translate into a long-term advantage for your company?
- Traction or company milestones
Traction is a huge part of showing that your business is already on ground. Investors will want to see the progress you’ve made so far and future milestones that you intend to hit. If you can prove that your potential customers are already interested in—or perhaps already buying—your product or service, then it is beneficial to include it.
Here are some key categories of traction that signal to readers that your company is making moves.
- Product Development: Where are you in the process? Is your product in the market?
- Manufacturing/Distribution: Do you have an established partner for production/manufacturing and Distribution?
- Early Customers and Revenue: Do you have existing customers? How many? And how fast are you growing? Have you started generating revenue?
- Testimonials and Social Proof: Do you have any positive client reviews of your product/service? Any high profile customers or industry experts?
- Partnerships: Have you been offered partnerships with any established brands?
- Intellectual Property: Do you have any patents for the technology behind your company? Is your company name trademarked? Is it secured?
- Financial plan
Your business plan isn’t complete without a financial forecast. A typical financial plan is required to have monthly projections for the first 12 months and then annual projections for the remaining three to five years. Three-year projections are typically adequate and a lot of business plan writer use it, but some investors will request a five-year forecast. We believe that it is better to err on the side of caution.
Your financial plan section should have other sub sections to help provide more detail, and they include;
- Personnel plan
Your personnel plan details how much salary you plan on paying your employees. For a small company, you might list every position on the personnel plan and how much will be paid each month for each position. For a larger company, the personnel plan is typically broken down into functional groups such as “marketing” and “sales.”
- Sales forecast
Your sales forecast is just your projections of how much you are going to sell over the next few years. A sales forecast is typically broken down into several rows, with a row for each core product or service that you are offering. Don’t bring in all the boring details just yet, just focus on the highlights.
- Profit and loss statement
The profit and loss statement which is also known as the income statement, is where your numbers all come together and show if you’re making a profit or taking a loss. This is section should also include a list of all other ongoing expenses associated with running your business.
- Balance sheet
The balance sheet provides an overview of the financial health of your business. It lists the assets in your company, the liabilities, and the owner’s equity. If you subtract the company’s liabilities from assets, you can determine the net worth of the company.
- Use of funds
Since you are raising money from investors, you should include a brief section that details exactly how you plan on using your investors’ cash.
This section doesn’t need to go into excruciating detail about how every last dollar will be spent, but instead, show the major areas where the investors’ funds will be spent. These could include marketing, sales, or perhaps purchasing inventory.
- Exit strategy
Another thing you would need to include in your financial plan chapter is a section on your exit strategy. This aspect is very necessary for an entrepreneur who is looking for investors.
An exit strategy is your plan for eventually selling your business, either to another company or to the public in an IPO. Since you intend to have investors, they will want to know your thoughts on this. After all, your investors will want to get a return on their investment, and the only way they will get this is if the company is sold to someone else.
While you may not go into great detail here, but you would need to identify some companies that might be interested in buying you if you are successful.
- Future growth projection
In this section, you have to indicate if your business has growth potentials, and what your growth projections are. If you have any plans of introducing new products to compliment the already existing ones, list the products and state why they would help your business grow. You can provide a timeline of when you expect each new development to take place and if you would need to acquire larger space for that.
- Appendix
If you need more space for product images, additional information or other technicalities, use the appendix for those details. An appendix to your business plan isn’t a required chapter by any means, but it is a useful place to stick any charts, tables, definitions, legal notes, or other critical information that either felt too long or too out-of-place to include elsewhere in your business plan. If you have a patent or a patent pending, or illustrations of your product, this is where you’d want to include the details.
10 Reasons Why Your Business Plan May Fail to Get Funding from Investors
With a lot of businesses, both small and large, opening up and which require funds for sustenance, investors and lenders are sometimes overwhelmed with business funding requests.
Most times, a business plan is the only basis investors have for deciding whether or not to invite an entrepreneur to their offices for an initial meeting. With so many funding request, investors usually pick up a business plan while keeping an eye out for a reason to drop it back.
It should be noted that no business is more special or more important than the other, and as such every mistake, no matter how slight, would count against you. So, in writing a business plan that you are looking to get funding with, there is no room for mistakes.
That said, here are pitfalls you have to avoid when writing a business plan that you intend to get funding with.
- Unnecessarily inflating the value of the business
Investors would always prefer that you say things as they are. Unnecessary hype would not do your funding prospects any good. You are advised to lay out the raw facts – the problem, your solution, the market size, how you will sell it, and how you will stay ahead of competitors – and allow the investors be the judge.
- No effective market strategy
Business plans that fail to explain in good details their sales, marketing and distribution strategies are not going to get the nod. You must thoroughly research your target market to know who you are selling to and who would buy from you. You must explain how you have already generated customer interest, obtained pre-orders, or better yet, made actual sales – and describe how you will leverage this experience through a cost-effective market strategy.
- The statement “We have no competition”
No matter what you may think or what niche your business is in, you have competitors. Maybe not a direct competitor – in the sense of a company offering an identical solution – but at least a substitute. A competitor is one who has something to do with that line of business. To say that you have no competition will make investors to conclude that you do not have a full understanding of your market.
- Failing to identify a true problem
Problem is synonymous with market opportunity. The greater the problem, the more widespread the opportunity; and the better your product is at providing solution, the greater your market potential. If your business plan cannot pin point a true problem it wants to solve, then it is would be tossed out.
- Too long
You should be aware that investors are very busy people, and do not have the time to read long business plans. They also favor entrepreneurs who demonstrate the ability to convey the most important elements of a complex idea with an economy of words. Keep in mind that the primary purpose of a fund-raising business plan is to motivate the investor to pick up the phone and invite you to an in-person meeting, so you should endeavor to keep it as short as possible.
- No risk analysis
As far as investors are concerned, an effectively written business plan is one that is able to balance risks and rewards. Some of the first things they want to know are the risks inherent in the business, and what has been done to mitigate these risks. You should be able to provide an analysis of your market risks, operational risks, management risks, legal risks, technical risks etc. Without this, your business plan would not be given a second thought.
- Poor organization
Though there is no specific sequence for a business plan, but you should ensure that your business plan should flow in a nice, organized fashion. Each section should build logically on the previous and the next section, without requiring the reader to know something that is presented later in the plan. Any business plan that is not properly arranged would only see the trash.
- Too repetitive
All too often, a plan covers the same points over and over. It is recommended that a well-written plan should cover key points only twice: once, briefly, in the executive summary, and again, in greater detail, in the body of the plan. But some entrepreneurs tend to emphasize points by being too repetitive. This fact makes the plan boring and it should be avoided by all means.
- Grammatical mistakes
Spelling mistakes and poor grammatical constructions tend to make any written document difficult to decipher. An investor may not trust anyone that allows silly mistakes in his business plan to run a profitable business. This just goes to show that the person is careless. You should use spelling and grammar checkers, and equally get other people to edit the plan, so as to avoid mistakes.
- Unrealistic financials
A lot of entrepreneurs are in the habit of blowing up their business financial projections in a bid to make the business look more profitable than it really is. Investors would always see through this, and trust me, they won’t be impressed.You should work on keeping your projection realistic and at par with what the market gives.