Effective business planning is critical to your company’s long-term success, including its ability to raise capital and grow. As a result, bankers, accountants, consultants, academics and other stakeholders have written volumes about business plans — the do’s, the don’ts and everything in between.
Here’s the thing: there’s no one right answer.
There are, however, some best practices and guidelines that you can use to create an informative and comprehensive business plan that provides the foundation on which to go to market or grow an existing company.
A properly prepared business plan should tell a story, make an argument and conservatively predict the future. All companies have different stories to tell, different arguments to make and different futures to predict, so the key is to showcase that information about your company.
In addition to telling a story, a business plan also includes setting goals, explaining your company’s objectives and outlining the steps you’ll take to achieve those goals and objectives. A well-written business plan lays out the best and most strategic path to growth, as well as the rationale for that strategy and the steps taken to achieve the strategy-driven goals.
In essence, a business plan articulates and explains
- why the chosen plan to build the company and achieve the company’s vision is the best one;
- what resources it will need to implement the vision;
- what team members, skills and leadership is necessary to execute the vision; and
- what path the team will follow to get there.
The most successful business plans also include insight on anticipated challenges, risks and contingencies. The more thorough the analysis, the better the chances that most of the goals set forth in the business plan will be achieved. You can’t predict the future, but you can plan for and anticipate possible outcomes. And the best place to do that is in your business plan.
YOUR BUSINESS MODEL
One of the most critical elements in your business plan is your business model — in other words, how will your company function and be profitable? Consider the following questions to help articulate your ideas:
- Who are we?
- What are we trying to do?
- What problem do we solve?
- How are we going to get it done?
- How do we reach our customers?
- Who else is doing this?
- How do we obtain our initial customers?
- Which are the easiest to reach?
- What is the target customer’s decision-making process?
- What market research have we done to be sure that anyone wants to buy this product or service at this price — or at all?
- Do we truly modify the way business is being done in our industry, or is this more of a fad or a trend?
- Are these targeted customer relationships profitable? How do we make money?
- What do we need to accomplish our goals?
- When are we profitable?
SENSITIVITY ANALYSIS AND CONTINGENCY PLANNING
Part of your business plan isn’t just who you are, what you offer, how you’re going to be profitable and what success looks like — it’s also a time to be proactive and plan for risks, challenges and contingencies.
Of course, these elements will vary widely depending on your industry and product or service. Now, however, is the time to examine those elements. What could have an impact on your business? Changing capital markets, customer demand patterns, new competitors or general market conditions? Weather? Something else?
Use your business plan to address these “what if” scenarios and how your business will approach each one. This sort of proactive approach not only demonstrates the depth of your knowledge, but can also give you the foresight you need to make quick pivots when challenges arise. Too many companies — including startups — get trapped in a reactive mode after a challenge or crisis occurs. While you can’t be prepared for every scenario, you can take time to understand some of the biggest risks to your company, and then outline contingencies to keep your company on a path to success.
You may also want to include sensitivity analysis in your business plan — in other words, a way to predict an outcome based on certain variables. Through sensitivity analysis, you can answer questions like:
- Will our business plan still be viable if 20 percent of our target customers don’t adopt our new product? 30 percent? 40 percent?
- What is the impact on our business plan if two key potential competitors become actual competitors?
- What is the impact on our business plan if we can’t attract new employees or strategic partners that we’ve identified as critical to implementation?
- What if we can’t raise the funds needed to implement the business plan?
- What if we have to give up more ownership and control than we had anticipated to raise the capital?
- What if we need to raise more debt capital?
- If we planned to borrow money to implement the business plan, what impact would higher interest rates have on the economics of that model?
- If our customers need to borrow to buy our products and services, what impact will higher rates have on these buying decisions?
- What if the market rejects the pricing structure that underlies the introduction of the new product or service?
- What if deeper discounts need to be offered to encourage customers to make the switch?
- What impact will this have on our margins?
The bottom line is that overly optimistic or weakly researched assumptions in a business plan can (and will) come back to haunt you. Even with conservative assumptions and adequate research, there are still many variables that can and will have an impact on the company. Sensitivity analysis seeks to anticipate the changes in these variables so that owners are not caught by surprise and, instead, better prepared to respond to those fast-moving changes.
TIPS FOR WRITING A SUCCESSFUL BUSINESS PLAN
Whether you’ve created zero business plans or 20, there’s no doubt they can be daunting to write. As you prepare to write or refine your own plan, keep the following tips in mind:
THINK LONG-TERM BUT ACT SHORT-TERM.
Be ready to modify the plan based on changes in market conditions but without taking your eye off the long-term goals.
EFFECTIVE BUSINESS PLANNING IS A CONTINUING PROCESS, NOT A STAND-ALONE TASK.
Don’t buy into the mantra that planning is a thing of the past. There are some who believe that market conditions are too dynamic and uncertain to make long-term business growth-oriented strategic planning possible. Yet in fact, fast-moving business conditions make the need for strategic planning that much more critical, provided that the plan does not sit on a shelf but rather is monitored and modified as conditions may warrant.
INVEST IN SYSTEMS THAT WILL GATHER COMPETITIVE INTELLIGENCE.
Information rules! If your company doesn’t have reliable data on the trends affecting its competitors and customers, then it’s dead in the water. Data is a key component of the business plan, as well as the insight-driven catalyst for changes to the plan or strategy.
CONNECT THE DOTS.
A well-drafted business plan understands and anticipates how all of the market forces and players fit together, taking into account social, environmental, political and economic influences and figuring out how these factors come together to afford your growth plans.
One common mistake is when the strategic assumptions underlying financial projections do not fit squarely with the written text of the plan. The ability to view things at 40,000 feet, 20,000 feet and at ground level — as well as the ability to see the dynamics of your markets at all of these levels — is key to effective growth planning.
And because these market conditions are never static and the relationships that connect the dots constantly change, you need to keep climbing the mountain to look down on the valley.
BUILD AN ORGANIZATION THAT’S COMMITTED TO GROWTH.
The commitment must begin with the leader or founder of the company, whose mission and passion become contagious, and everyone in the company focuses their efforts on meeting business growth objectives.
To achieve this, the company’s leadership must clearly communicate and reinforce the growth plans, objectives and strategies, reward those who contribute to the achievement of these goals and monitor the company’s progress, changing its course and direction as may be necessary.
If the course does need to change, these shifts in direction must be regularly shared with the company’s employees, together with an explanation for the need for the change. Employees at all levels will resent a change in direction without knowing it or understanding it and if they are not told how or why their positions and tasks must change to meet these new challenges.
DON’T BE AFRAID TO MEASURE AND MONITOR PERFORMANCE.
It’s critical to develop an objective set of metrics for each key area of the business plan. What does success look like to your company? It’s important to not only have a destination, but to also identify metrics against which your company can be continuously monitored and periodically measured against key goals.
The metrics may include sales, profitability, the number of new customer relationships added, growth market partners, the number of new employees, customer satisfaction, the level of employee turnover, inventory cycles, the number of new offices opened, warranty returns or even the number of new rounds of capital raised at favorable valuation rates.
Regardless of specific metrics, the growing company must build systems to track and measure these performance indicators and have the expertise in place to understand, analyze and properly react to this data once it has been reported.
DEVELOP HIGH-QUALITY PRODUCTS AND SERVICES.
As veteran entrepreneurs and professional advisors always say, a business plan is ineffective if the “dogs will not eat the dog food.” All business plans must revolve around a set of high-quality products and services that customers genuinely want and need.
Understanding what your company brings to the table — and how it helps your prospective customers — not only provides integral information to your business plan, but also guides your approach to the market and how you’ll bring your business from a plan to a profit.