3.2 What Goes into a Business Plan? Goals List and describe the basic elements of a business plan. Describe how to pull a business plan together. Vocabulary pro forma financial statement harvest strategy cover letter statement of purpose executive summary Every new business should have a business plan, but not all business plans are alike. The content of a business plan for a small, home-based, single-owner business will differ from a business plan for a large corporation with offices in many cities. But regardless of the business, all business plans serve the same basic purposes. They should also contain the same three basic components�introductory materials, the main body, and the appendixThe main body of the business plan will contain the bulk of the information about the business idea. It provides details on howthe business will succeed. A lot of time and effort will go into writing the main body of the plan, and it should be compiled before the other components in the business plan. It should be organized into the following sections, or elements. 1. Introduction 2. Marketing 3. Financial Management Statement 4. Operations 5. Concluding statement The introduction section of a business plan contains many important details about the proposed business idea. The following information should be included in the introduction section. A detailed description of the business and its goals The ownership of the business and the legal structure The skills and experience you bring to the business The advantages you and your business have over your competitors Something inspired the idea for your business. Describing how you came up with your idea can help lenders, investors, and others understand what your business is about. Your business plan should also outline your short term (three months to one year), medium-term (two to five years), and long-term (more than five years) goals. Stating goals will help provide you with direction and focus for your business activities. In your business, you should have a section detailing your form of ownership Will it be a sole proprietorship (one owner), a partnership (two or more owners), or a corporation (many owners that hold shares of stock in the business)? Provide information relevant to your form of business, such as who will make up your leadership team and how many shareholders you have. This section of the business plan is important because each legal form of business has an effect on how the business works and makes profits. If you use your business plan to obtain financing, the lender will be interested in this information. As the owner of the business, a written summary of your experience is an essential part of your business plan. This summary should emphasize all experience you have that relates to the business, including paid work experience, volunteer experience, and any hobbies you have that relate to your proposed business. Along with you, any other individuals that you hire to serve as managers will make up the leadership team of your business. The skills and experience of the members of your leadership team will also be relevant. You should list your company’s advantages over the competition. These advantages may include the following: Performance Quality Reliability Distribution Price Promotion Public image or reputation The marketing section of your business plan should describe the products and/or services you will offer, the market, the industry, and your location You should describe your products and services and explain how they differ from those already on the market. Highlight any unique features, and explain the benefits customers will receive by purchasing from your business. You will explain who your prospective customers are, how large the market is for your product or service, how you plan to enter that market, and how you plan to deal with competition. You should describe the industry in which you will operate. To find this information, you will need to perform research. Things you should include in this section are as follows: External factors affecting your business, such as high competition or a lack of certain suppliers Growth potential of the industry, including growth forecasts Economic trends of the industry Technology trends that may affect the industry You should describe the location of your business. Lenders and investors want to know exactly where your business will be because the location of a business is often a critical factor to its success. The financial section of your business plan will help determine your financial needs. It consists of three elements. Identification of Risks Prospective lenders and investors will want to know what risks your business faces and how you plan to deal with them. Do not be afraid to list potential problems. Lenders know that every business faces risks. They will be reassured to see that you have clearly thought through the potential problems and have a plan for dealing with them. Financial Statements A new business must include projected financial statements in its business plan. An existing business must include current as well as projected statements. A financial statement based on projected revenues and expenses is called a pro forma financial statement . Funding Request and Return on Investment You must indicate how much you need to borrow and how you plan to use the money. You should give investors an idea of how much money they can expect to earn on their investment in your business. You should state how much money you are personally investing and provide a personal financial statement. Investors will want to know who will maintain your accounting records and how they will be kept. The operation of your company is critical to its success. In this section of your business plan, you should explain how the business will be managed on a day-to-day basis and discuss hiring and personnel procedures. You should also include information on insurance and lease or rental agreements. Describe the equipment that will be necessary for production of your products or services and how the products or services will be produced and delivered. Why should a business owner have a harvest strategy for ending the business? While planning the operations of your business, you must also think ahead and plan for ending the operations of your business. It is important to plan for this in the early stages of your business. You may plan to operate the business for many years until you retire. Or you may have a short-term plan in which you operate and grow a successful business and then sell it. In any case, you need to have a harvest strategy. A harvest strategy , or exit strategy, is the way an entrepreneur intends to extract, or harvest, his or her money from a business after it is operating successfully. It details what strategy the entrepreneur has chosen and how much money he or she expects to gain. Plans for harvest could include selling the business to someone else or to another company, passing the business onto other family members, merging with another company, going public by selling shares of stock in the company to new investors, or closing the business and selling the assets such as the building and equipment. Having a harvest strategy in place gives you control over how you will end the operation of your business. In this section, you should summarize the goals and objectives you have for your business. You should also emphasize your commitment to the success of the business After you have completed the main body of your business plan, you will need to focus your efforts on the other components�the introductory elements and the appendix. Then you must pull all the components together into a well-organized, attractive document. Introductory Elements Every business plan should begin with a cover letter, a title page, a table of contents, a statement of purpose, and an executive summary. These elements help set the tone for the body of your business plan. A letter that introduces and explains an accompanying document or set of documents is called a cover letter . The cover letter for your business plan should include your name, the name of your business, and your address and telephone number. It should briefly describe your business, its potential for success, and the amount of capital you need Your business plan should have a title page that indicates the name of your company, the date, the owner of the company, the title of the owner, and the address and phone number of the company. A table of contents is a listing of the material included in a publication. It shows the reader what each page covers. It is similar to a table of contents in a textbook. It is important that your table of contents is accurate, so make sure the sections are listed in the proper order and the given page numbers are correct. A brief explanation of why you are asking for a loan and what you plan to do with the money is called a statement of purpose . It should be no more than one or two paragraphs Before getting into the detail of the main body of the business plan, readers will want to read an executive summary , which is a short restatement of the report. It should capture the interest of its readers. If the executive summary is unconvincing, a lender may decide not to read your entire business plan. This makes a strong executive summary critical to the success of your business. The executive summary should be no longer than one or two pages, and it should be written in a clear, simple style. Your executive summary should do all of the following: Describe your business concept and communicate what is unique about your idea Include your projections for sales, costs, and profits Identify your needs (inventory, land, building, equipment, etc.) State how much you want to borrow Although the executive summary appears before the body of the business plan, it should be written after the business plan has been completed. To write the executive summary, go through the business plan and find the most important and persuasive points you have made. Then draft an outline of an executive summary based on these points. The appendix to the business plan includes supporting documents that provide additional information and back up statements made in the body of the report. To help you determine what supporting documents to include, you should ask yourself what you would want to know about a business before you would lend it money. Documents that might be contained in the appendix include the following: Tax returns of the business owner for the past three years Personal financial statement of the owner Copy of proposed lease or purchase agreement for the building space Copy of licenses and other legal documents Copy of resume of the owner Letters of recommendation Copies of letters of intent from suppliers Copies of any large sales contracts you have already negotiated Your business plan is your best opportunity to let other people know what you want to do with your company. It gives you the chance to convince them that your idea is sound and that you have the talent and resources to make your idea a successful business venture. To make the best of this opportunity, you will want to create an attractive document that is neat, well organized, and inviting to read. Handwritten business plans are not acceptable. All business plans must be word processed and printed on standard-sized white paper. In addition, your business plans hould follow a standard format and be organized as shown here.