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A quick guide to preparing a business plan
A carefully prepared business plan is not only the key when seeking finance, it is a valuable business tool. How to produce an effective plan.
- The benefits
- Executive summary
- The business and key people
- The product/service
- Business market
- Marketing and advertising
- SWOT analysis
- Premises and facilities
- Personnel requirements
- Financial information
The catalyst for preparing a firm’s first business plan is often the need to present a business proposal to a bank or potential investor. A well-drafted business plan is crucial when raising finance or trying to attract investment, but it is also an essential tool for the successful management of a business. It is particularly relevant in times of economic uncertainty, where downturns in business can be particularly sharp and sudden. Good planning can be the most effective insurance.
Business plans should aim to give more than a snapshot of the future. Because circumstances, people and opportunities change, a good business plan should try to portray the moving picture and ever-evolving situation. Business plans therefore need to be regularly reviewed and updated, thereby becoming a valuable aid to good management.
By planning ahead many benefits accrue, for example, proprietors/directors can:
- Step back from day-to-day work and consider the overall direction of the business, facilitating decisions regarding strategic goals and the route to success.
- Make better-informed judgements having previously considered the impact of a particular cause of action on profitability, rather than part way through a project.
- Ensure that business decisions drive the company in the right direction.
- Ensure that there are adequate resources and working capital to achieve business goals.
Additionally, a properly documented business plan should:
- Provide the necessary vision and direction to focus the business.
- Inspire confidence and belief in the firm’s potential.
- Provide a document recognised by lenders and investors as a basis for lending/funding decisions.
- Enable key staff to participate in the long-term future of the organisation by setting out clear business objectives, which help to define career paths.
There is no definitive guide as to the precise form and content of a successful business plan as its structure is largely determined by its particular purpose and the firm concerned. However, the rules below are valuable:
Five golden rules for an effective business plan.
Ensure your plan is:
- Simple – for the reader to understand.
- Focused – on your firm’s needs.
- Relevant – to the reader’s interests.
- Accurate – be prepared to justify your analysis.
- Realistic – information must be credible.
Always remember to explain the importance of the product/service and its market potential, avoiding technical language and detailed specifications. Bear in mind that readers may not have specialist knowledge of your particular area and that your proposal may be one of many which they read. So, focus on the real issues, giving projections for sales, costs and cash flow, for example, but reserving financial detail for the appendix. Remember to explain assumptions.
If you’re aiming to raise finance, state clearly the level of funding needed and why it is required.
The following is a useful format for most business proposals.
1. Executive summary
This overview should encapsulate the whole business plan and ideally fit on one page. It is normally written after the main sections are finished and should focus the reader’s attention to the important elements of the business plan.
2. The business and key people
Describe the legal status of the business, its history, facilities and organisational structure, whilst also stating its strategy, vision and mission statement. It is particularly important to outline the skills of partners, directors, managers and key staff, such as designers and sales people, since the reputation and experience of those involved heavily influence the success of the business (include brief CVs).
3. The product/service
Clarify the range of products/services and state what is special about those offered and any under development. It’s similarly important to note any niche markets. If the firm is responsible for any innovations, achievements or has won competitions, these should be mentioned.
4. Business market
Analyse turnover by market segment, indicating the profitability of each area. Note whether each segment is declining/static/growing and why, besides giving the organisation’s current and projected market share. An overview of economic conditions or legislation relevant to the business is also useful.
Briefly describe the organisation’s major clients, and analyse turnover by client, where appropriate. This section will highlight any dependency on a small number of customers and highlight the risks. It may be wise to elaborate on certain individual customers and their business relationships with the organisation in order to allay any concerns over business concentration.
6. Marketing and advertising
Outline your marketing activities to demonstrate how you identify and develop new business.
Note major competitors, their strengths, weaknesses and market share. Consider how vulnerable the organisation may be to any particular competitor.
8. SWOT analysis
The organisation’s major strengths, weaknesses opportunities and threats should be analysed. Don’t avoid weaknesses and threats as these can only be dealt with once identified!
9. Premises and facilities
Report whether the premises and plant are owned or leased, whether they fulfil existing and future needs, and summarise any major commitments. Outline future capital expenditure and indicate the current state of facilities, including obsolescence and the impact of technological advancements, such as CAD.
10. Personnel requirements
Include the number of employees, anticipated employment needs and note the skills which are generally available. Give an indication of the firm’s training policy, recruitment and promotion policies.
11. Financial information
This is normally provided as an appendix and may include some summary narrative, together with a clear indication of funding requirements. The following should be covered:
- Five-year summary of the profit and loss account.
- Key ratios to demonstrate the firm’s strength e.g. gross profit, return on capital employed.
- Profit and loss projections.
- Cash flow projections.
- Forecast balance sheet.
- Detailed explanation of any assumptions.
- Sensitivity analyses (‘what if’ scenarios), e.g. the impact of changes in interest rates and break-even analyses.
The following chart summarises the continuous nature of business planning and suggests how a firm can develop in a positive spiral. Because of the breadth of detailed information that is required, your accountant or other adviser may assist with the preparation of this.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained
from on the basis of this publication. Details correct at time of writing.