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Ten elements of a good business plan.

A business plan is a comprehensive description of your business, the environment in which it operates, and how you will run it over the next three to five years. Preparing one takes effort, but forces you to think critically about the viability of a new venture. Besides, most bankers and venture capitalists won't even talk to you if you don't have one.

Typically, a business plan includes at least the following ten elements, which are described in some detail below:

* Executive summary

* Description of the company

* Market and competitiors

* Marketing strategy

* Design and development plans

* Manufacturing and operations


* Management team

* Overall schedule

* Critical risks and problems

* Financial plan

Executive summary

Potential investors read this first to see if the plan merits a complete reading. The summary should be concise (one to two pages) and compelling. Briefly describe the basics of your business plan: market opportunity, management team, financial returns, and terms of the investment you're seeking.

Description of the company

Described how and when the company (or idea) got started, and what stage it is in the development process. Briefly delineate the firm's product and services, how the major players go involved, and what the current opportunity is. Your company's general strategy also should be included here. Strategic elements include the company's growth stages over the next several years; primary advantages over competitors; tactics you'll use (i.e., cost leadership, differentiation, focus); plans for raising money; and personal goals for the business.

Market and competitors

Analyses of your industry, competitors, and customers help establish that markets do exist for your products and that you can successfully compete in them. The first analysis should include specifics on total sales, growth rates, typical gross margins, and average profitability for your industry. The industry's entry barriers should be described, as should its driving forces, the characteristics of its strategic groups, and the factors required to succeed in it.

Once you've detailed what it takes to succeed in your industry, construct a table that rates competitors on these factors. For each competitor, evaluate the quality, reputation and market share of their products; their financial, managerial, and technical resources; their warranty, manufacturing, research and development, and distribution systems; and the loyalty customers and distributors show their products.

If you cannot precisely characterize your customers, then you must do more research, For each target market, detail customer age, sex, income group, marital status, and place of residence. Describe how often they buy this product; where and how much they spend and whether they comparison shop; how price-sensitive and quality-conscious they are; what features they want and service they need; whether they're brand loyal; their degree of satisfaction with current products; and what specific media they are exposed to - i.e., trade journals, newspapers, TV and radio stations. If your customers are retailers or distributors, include what motivates them in choosing suppliers.

Marketing Strategy

If you've chosen an overall competitive strategy of differentiation (or cost leadership, or whatever), this section would describe its implementation. For each target market, describe: your product in terms of its features, packaging, warranty, services, prices, price, and discount policy; your plans for promotion, including trade shows, catalogs, direct or telemarketing, advertisements, and credit policies; and your distribution systems, whether through a sales force, "middlemen," distributions, or manufacturer's reps. If you have overseas or other distribution plans, explain them in this section.

Design and Development Plans

For those with no further product development plans, this section may be omitted. However, if you're still fine-tuning design, anticipate redesign, or are trying to raise money, describe here: the current status of product development, scheduling and cost projections for completion, status of patents if any, and details of future design or product improvements.

Manufacturing & operations plan

How do you make your products? How is your business conducted on a daily basis? Specify here facility location and its advantages (i.e., labor availability, room for expansion, visibility, low cost, proximity to customers or suppliers). Describe the type of plant or store, the equipment used and whether you own or lease it, inventory systems, and the manufacturing process itself (i.e., assembly line, job shop, subcontracting arrangements).

Management Team

Here too is the place to detail the competence of your management team. Draw an organizational chart and describe the general responsibilities of key personnel, as well as their education, job experience, and other abilities. Specify who will be owning partners and describe any profit-sharing systems. List directors and their backgrounds, and do the same for any outside consultants you'll be hiring. The team you describe should offer a good blend of technical, managerial, production, financial and marketing skills.

Overall schedule

Project the order and timing of major events in your enterprise. Typical milestones: company incorporation; completion of design, development, prototypes; patents secured; completion of facilities; first sales; growth trend in sales; new personnel added; geographical expansion of sales.

Critical risks and problems

Every business faces risks, and every potential investor knows it. Typical problems are: competitors dropping prices; unmet sales projections; unanticipated or higher costs; difficulty finding suppliers; lack of good personnel; denial of patent. Describe here the three or four most critical risks in your venture, and your plan for succeeding in spite of the problems.

Financial plan

This section establishes that your venture can be profitable and has sufficient cash flow. Describe, in a paragraph or two for each, the major conclusions of four financial statements: breakeven analysis, cash flow and income statements, and balance sheet. (Include the actual worksheets at the end of your plan.)

A breakeven analysis tells how much you must sell to make a profit, and computes profit or loss for different sales level. State what your breakeven point is and how soon the firm will reach it. If you have difficulty predicting sales, work out scenerios for several levels.

A cash flow analysis shows how you will survive until the business breaks even. Describe the firm's cash position - broken down by month of the first year, by quarters for the next two year. Note beginning position, general trends, major fluctuations, and plans for handling low cash balances.

The income statements subtracts expenses from revenues, yielding net profit. Project profit trends (sales, gross margin, major expenses, net profit) for three years and describe major determinants. Explain any major fluctuations. Specify returns on sales, equity, and assets, and gross margin percentage.

The balance sheet shows what your firm owns, what it owes, and the difference between them - its net worth. Project a balance sheet at startup and after years one, two and three, noting major trends. Cite growth in assets, debt, and equity. Also note the following ratios: current ratio, which gives an indication of the firm's liquidity; debt/equity, which measures company borrowing. Inventory turnover and days receivable indicate how well current assets are managed. Compare these ratios to industry standards.


The foregoing describes a basic business plan. If you're raising equity capital through stock offerings, your business plan should detail the terms, conditions, schedules, and projections for that process as well, In any case, it's obvious that writing a business plan requires a formidable expenditure of time and energy - perhaps two hundred hours worth.

But once you do it, you'll know your company inside out. And you'll have a document to present to potential investors or others for feedback. Don't forget the business plan once your venture is started, either, even though you're busy. Keep it updated, and it'll provide the basis for ongoing strategic plans.

Paul Larson, PhD., is an associate professor of management at The University of Montana, and the author of The Montana Entrepeneur's Guide, from which this article was adapted.
COPYRIGHT 1991 University of Montana
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Economic Development
Author:Larson, Paul
Publication:Montana Business Quarterly
Date:Dec 22, 1991
Previous Article:Governmental market opportunities for Montana small business.
Next Article:Montana and its region.

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