Perhaps you’ve heard the old saying that failing to plan is the same as planning to fail.
It’s commonly attributed to Benjamin Franklin, the 18th century inventor and politician whose belief in the value of preparation was strong enough that he once made a list of more than 12 character traits around which he planned to structure his life.
Franklin’s preparation paid off. Today, he’s remembered not only for signing the Declaration of Independence but for researching electricity, serving as the U.S. ambassador to France and founding the University of Pennsylvania.
Accomplishments like those illustrate the importance of preparation for entrepreneurs starting or expanding their own businesses, especially since only half of all startups survive their first five years. The secret: A well-crafted business plan can help make yours one of the success stories.
Not only is having one often a prerequisite for lenders and investors, it’s a road map that helps owners identify both risks and opportunities in their markets so that they’re prepared for both.
Indeed, some of the most successful U.S. entrepreneurs were known for their careful strategy. John D. Rockefeller, the oil magnate whose name became a byword for wealth in the late 19th and early 20th centuries, often talked about “our plan” when he was developing Standard Oil Trust.
Rockefeller’s strategy was corralling what had been a haphazard oil supply that often outpaced demand and hurt producers by keeping prices low. His business expanded enough that it eventually controlled the majority of oil production in the U.S. Although it was later broken up by the U.S. government, its descendants—ExxonMobil, Chevron and ConocoPhillips—still dominate the industry today.
“Business planning helps entrepreneurs work smarter, stay alert for roadblocks, test new ideas, stay motivated, help align expectations with stakeholders and investors, and even reduce stress.”
“Business planning helps entrepreneurs work smarter, stay alert for roadblocks, test new ideas, stay motivated, help align expectations with stakeholders and investors, and even reduce stress,” wrote Robert Price, executive director of the Global Entrepreneurship Institute, in an article on the organization’s website.
“Writing a business plan forces you into disciplined thinking if you do an intellectually honest job,” he says. “An idea may sound great in your mind, but when you put down the details and numbers, it may fall apart.”
A further advantage of your roadmap is that, ideally, it changes with your business. It’s considered a living document, but despite its adaptability, there are basic elements the Small Business Administration says any plan should contain. They include:
1. Executive Summary:
A snapshot of your plan. This will be the last thing you write, but possibly the most important, since many readers will stop here if they’re unimpressed. If your company is a startup, focus on your background and experience as well as that of any partners to show the underpinnings of the company, the agency says. If you’re better established, make sure to include details such as when the business was started, the names of the founders and their roles, how many employees you have, and where your operations are situated.
2. Company Description:
Explain what your company does and how it stands out from competitors. List major customers as well as markets you plan to target in the future. You’ll want to include competitive advantages, such as expert personnel like the whiz-kid coder you just hired, or location: Perhaps your floral shop is next door to an all-night wedding chapel.
3. Market Analysis:
It’s crucial to understand the market you plan to enter. Find out who your competitors are, analyze their cash flow and profit margins, and research technological developments in the industry that might be game-changers. Part of describing your customers is a general awareness of how much they spend and when. For instance, Black Friday got its name because it kicks off the lucrative Christmas shopping season that moves many retailers into full-year profitability. If your business is grappling with a similar challenge, you’ll want to be sure you have the resources and cash flow to withstand operating at a loss for 11 months out of the year.
4. Organization and Management:
Spell out the details of ownership, including investors and show your organizational chart. Specify whether your business is a sole proprietorship, partnership or corporation, and if it’s the latter, what type.
5. Service or Product Line:
What do you sell, how will it help your customers, and how often will they need to replace it? The answers to those questions can be crucial factors in business sustainability. Include any patents or copyrights you own.
6. Marketing and Sales:
The best idea in the world won’t take off if you don’t let your potential customers know what you have. Are you going to rely on word of mouth, promotional discounts or advertising? Remember, your method will have to be tailored to your market. New York businesses are famous for paying people to stand on the sidewalk promoting everything from discounted pizza slices to bargain jewelry prices, but that doesn’t work nearly as well in cities without a high volume of foot traffic.
7. Funding Request:
You’ll want to include how much you need right now as well as how much more you might need over the next five years. A critical point is how you plan to repay borrowed money to creditors (if you opt for debt financing) or, alternatively, generate returns for investors. Both will want to know how you’re spending their money and when they’ll see a payoff.
8. Financial Projections:
If you need funding, provide realistic forecasts that show how you plan to generate future cash flow. Unless you’re borrowing from your parents, your funding sources will want to know. It’s easier if you can show recent financial statements and base your projections on those, since that will give lenders an idea of how realistic your numbers are.