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Business Plan Writing guide Module

Chapter 1: Introduction - What is a Business Plan?

The fundamental role of a business plan is to generate a framework that evaluates all aspects of the economic feasibility of the business project including an explanation and analysis of the business prospects.

Functions of a Business Plan:

  • It can determine and focus your business objective.
  • It can be used as a selling tool to acquire finance.
  • It can reveal omissions and weaknesses in the planning process.
  • It can be used to solicit opinions and advices from experts about your business.

In order to write a successful business plan, the following steps are important to notice before you start:

  • Write out the primitive business concept.
  • Collect all the necessary information on the feasibility and the specifics of your business concept.
  • Focus and perfect your concept based on the data you have collected.
  • Draft the particulars of your business.
  • Put your plan into a convincing form.

The course starting from the next chapter will help you create a business plan, which is divided into seven key elements through chapter two to chapter eight, including descriptions, guidelines for creation and tips for avoiding common mistakes, together with a business plan sample and financial statements formats in the appendices.

Chapter 2: Introductory Elements

The very first part of your business plan includes the introductory elements, which is the cover page, executive summary, and table of contents. It creates the first impression of the whole investment project to your readers. In such case, the introductory elements, especially the executive summary, decide whether your readers will read the rest of your plan or not. Furthermore, the table of contents indicates how well you have organized the entire plan. Therefore, all of your introductory elements must be of good quality both in appearance and substance.

A) Cover Page

The cover page should be a simple page that contains the project name and the presenting team's name. Also include the words "Business Plan" as the heading of the page.

B) Executive Summary

The executive summary is an introduction to your project. It is the part within the business plan that most readers will go through first. Investors will read the executive summary first to get a snapshot of your project and to evaluate your professionalism and the feasibility of your business.

As the executive summary is the most important part in your business plan, prepare it when you have finished the whole plan. When you write on other sections of your plan, extract few sentences for insertion in your executive summary. This work will remind you to include the essence of these sections. The executive summary should be kept in brief, to the point and interesting, and should consist of the followings in brief:

  • A description of your company, including your products or services
  • Your mission statement
  • Your business's management team
  • The market and your prospect customers
  • Marketing and sales strategy
  • Financial projections

The executive summary will end with a summary statement, usually a persuasive sentence, which are designed to convince the readers that your business is a winner.

It is extremely important to know that the executive summary is the first thing all readers will examine. If your executive summary is written badly, then it will be the last thing that people will read and ignore the rest of your whole plan.

C) Table of Contents

The purpose of the table of contents is to provide readers a quick and easy way to find particular sections of the plan. All pages of your business plan should be numbered and the table of contents should include page numbers. After you have assembled your plan and numbered your pages, go back to the table of contents and insert the page numbers. Make sure you have created headings for all major sections and subsections.

Chapter 3: Business Description

Your business plan must be able to project a clear picture of what your business is about. The business description is your corporate vision that includes: what industry you are in, what products or services you can offer, what is your position within the market, and at what price range are you going to sell your products or services.

A) Industry Overview

This section is a brief overview of the industry you will be setting up your business in. To impress readers, you will need to demonstrate that you are in a hot industry with a good prospect.

The following points will help you gather information on describing the industry circumstances:

  • What is the size of your industry?
  • Who are the leaders in this industry?
  • What are the markets for this industry?
  • What economic trends will affect this industry?
  • What is the long-term view for this industry?
  • What are the barriers to entry in this industry?

In order to gain more statistics and information regarding different industrial sectors, you can visit the government trade department website in your own country. You can collect more information about industries and trade demographics from your government statistics department, local chamber of commerce or economic development center, etc. Try to collect as up-to-date research information as possible.

The following are some skills for writing on this section:

  • Don't just base your business plan on assumptions. Backing up with solid research work and realistic demographics will make your plan seem more reliable. Quote for all the sources of these data.
  • Collect industry and seasonal trends from business newspapers and magazines.
  • Listing out possible risks your company or your industry may encounter demonstrates pragmatic research work. Make sure to include how your company's policy or marketing strategy can overcome such risks.

B) Company Summary

The purpose of this section is to give the readers a clear point of view about your company. Start with a mission statement on who your product or service is targeted to. Then elaborate more on the technical aspects of your company. Maintain your writing in a story telling form to keep it interesting. Good points for discussion are:

  • What kind of role is the company playing? Wholesaler? Retailer? Manufacturer? Service Provider?
  • What is the legal structure for the business? Sole proprietorship? Corporation? Partnership?
  • Who are the company's principal owners and what pertinent experience do they bring?
  • What market needs will you meet? Who will you sell to? How will your products or services be sold?
  • What kind of supportive systems will be utilized? Customer service? Advertising? Promotion?

Overall, this section of your business plan should give the readers a better understanding of what your company is about. Again, keep it concise and avoid irrelevant personal information.

C) Products or Services

In this section, provide in details of each of your products or services. Describe who are the end users. Highlight the specific features or functions of your products.

Here, you have to emphasize your USP, "Unique Selling Point". This is what most bankers and investors would like to explore. Without a Unique Selling Point, your products or services will not be interesting at all and you will not be able to convince people to consume them.

Examples of USP for several different products:

  • Head and Shoulders: "You get rid of dandruff"
  • Olay: "You get younger-looking skin"
  • Red Bull: "Gives you wings"
  • Domino's Pizza: "You get fresh, hot pizza delivered to your door in 30 minutes or less - or it's free."
  • FedEx: "When your package absolutely, positively has to get there overnight"
  • M&M's: "The milk chocolate only melts in your mouth, not in your hand"

Also, you may mention a comparison of the products or services your competitors are offering in relation to yours, and how your products can prevail in this market. Think of a number of reasons for this - it is a new technology to the market, the location is excellent, the market is ready for your product, the product has a competitive production cost such that it can be sold at a lower price, etc.

D) Positioning

Your position is your standing point in the marketplace. It is about where your products and those of your competitors will set in the market. As you cannot sell your products to all customers within the market, your positioning is based on how much you will charge and which group of customers you are targeting. The following factors can help you find your position in the market:

  • What uniqueness does your product or service have?
  • What customer demand does your product satisfy?
  • How do you want people to view your products or services? Hi-tech and expensive products with better design or cheaper products with fewer functions?
  • How do your competitors position themselves within the market?

After analyzing the above factors yon can now clearly know where you can position yourself, and show the readers a clear picture of which part of the market your products will be sold.

E) Pricing Strategy

Your pricing strategy demonstrates how you will make a profit while allowing the price to remain competitive. When calculating the price, identify fixed costs and variable costs. Determine a breakeven point, that is, how many products do you have to sell in order to cover your fixed costs. These can be derived from the financial section later in the plan. You may have to consider constructing your financial section before completing this topic.

You may also discuss whether your price will be lower or higher than your competitors and why you can maintain your market share in the presence of competition so that your can make profits. For example, a souvenir shop sets higher prices since it considers its products to be luxury items. A cafe in an expensive location may charge slightly more than other restaurants to cope with higher spending customers.

However, investors are trained to reject business plans in which the products or services will be higher in quality and lower in price than those of their competitors. This creates a bad impression since it is inherently unrealistic. If you really have a higher quality product, it is more likely that you will charge more to consumers with a higher demand.

Chapter 4: Market Analysis

This section is to provide facts to convince readers that your business has enough customers in an industry, and can create sales in the face of competition. It is one of the most important parts of the plan. Taking into account the current market size and trends, you may have to perform extensive research on this. Many of the financial requirements, such as manufacturing and marketing costs, and the amount of capital that you need, will be based on the sales estimation you have created here.

A) Customer Analysis

The description of your target customers defines the characteristics of the people whom you want to sell your products to. In here you will describe whether your customers are price elastic or quality conscious.

Before analyzing your customers, research work is necessary. Use the following questions to start with your analysis:

  • How old are they?
  • What gender are they?
  • Where do they live?
  • What is their family structure? (Married? Number of kids?)
  • How much do they earn?
  • What do they do for a living?
  • What is their lifestyle like?
  • How do they like to spend their spare time?

When writing on this section, avoid describing customers in unclear general terms, such as "all people who want to buy cars" or "anyone who needs a mobile phone". You may also need to include details of what geographic region you plan to sell in. Is your market national, regional, international, or local?

B) Market Size and Trends

This section defines the total market size as well as the segment of the market your business will target. You will have to use numbers as well as trend information to make a case for a feasible current market as well as its growth potential.

Follow these questions in order to determine the size of the market:

  • What proportion of your target market has already consumed on a similar product to yours before?
  • How much of your product or service might your target market buy? (In terms of sales amount and/or in units of products sold.)
  • What proportion of your target market might be repeat customers?
  • How might your target market be affected by economic events (e.g. during stock market crash)?
  • How might your target market be affected by government policies (e.g. changes in tax rates)?

Once you have all this information, you can start writing on this section in the form of several short paragraphs. Describe whether these events will have a positive or negative impact on your specific business. If you have several target markets for different products, you will have to divide them into sub-sections. Remember to properly quote your sources of information within the section.

C) Competition

Competition is a way of life. Presenting your business in the face of competition proves that you understand your market. Advances in invention technology can wipe out the profit margins of a successful business and cause them to collapse overnight. Because of this unpredictability, it is important to know your competitors well.

Questions like these can help you identify your competitors:

  • Who are your nearest direct competitors?
  • Who are your indirect competitors (e.g. substitute products)?
  • How are their businesses? Steady? Increasing? Decreasing?
  • What are their strengths and weaknesses?
  • How do their products differ from yours?
  • Who is the price leader?
  • Who is the quality leader?
  • Who has the largest market share?

Furthermore, pay attention to your competitors' sales and promotion strategies. When did they reduce prices for sales? Using this technique can help you understand your competitors better on how they operate their businesses.

When writing on this section, begin with a short discussion of each of your primary competitors. If possible, include their annual sales and their market shares. Explain why you can capture a share of their business through their weaknesses. Is it price? Value? Service? Convenience? Reputation?

Even if your product or service is truly innovative, you need to look at what else your customers could buy instead (substitute products). Remember, the first personal computer competed with calculators and typewriters; the first calculator competed with abacuses.

Consider using a table to present your analysis, since it will allow your competition to be evaluated at a glance. Columns should include the names of your competitors and rows can include market share, annual sales (if available), strengths, weaknesses, and comments, etc.

D) Sales Forecast

The sales forecast is based on the estimation of the size of your market and your market share. This should include sales in units and dollars for the first five years, with the first year broken down into months, and the second year into quarters, if applicable. These numbers are so important to the financial sections which you will present later in the plan.

For projecting a sales forecast, you may have to find out answers like:

  • How many customers will consume the same kind of product as yours?
  • How many customers will consume the same kind of product as yours?
  • What percentage of their spending will you get, comparing to competitors?

Instead of forecasting the annual sales as a single figure, use the assumption derived from above and generate three figures: pessimistic, optimistic, and realistic. Then put the figures in by months, as depending on your business, there could be huge variations by seasons. In fact, a good method to do forecasting is to ascertain the average sale per customer from trade associations.

Once you have made assumptions on the inflation rates and your annual growth rates, you will be able to forecast the sales from the second year to the fifth year by multiplying your first year sales with these factors. Besides using tables or graphs to show your annual sales at a glance, write in short paragraphs describing the market trends and seasonal trends on the three circumstances mentioned above.

All this work can be time-consuming, but it has to be done in order to make your business plan valid. Lastly, don't forget to quote all your sources of information within the body of this section. All readers of your plan will need to know the sources of the statistics or opinions that you have gathered from others.

Chapter 5: Start-up Summary

This section will describe the start-up plan for your product's development. It gives details of how your product is being developed and what resources are required to get it produced. You should include details of development costs, location and labor requirements.

A) Start-up Process

Before launching your product into the market, your product has to be developed and produced. Demonstrate with a schedule showing when this work will be completed. Include time provisions for obtaining a patent or a trademark where applicable.

In detail, also project a timeline you will need to set up factories and offices. This may include renovations, purchasing necessary machinery and furniture, and other important stages in this development cycle. Then describe in small paragraphs to elaborate the whole development process.

B) Start-up Cost

For every item described in (A) above, construct a simple budget table and put in numbers for the amount of capital that will be required to incur for all these expenditures. This budget may include rent (if factory and/or office are hired), insurance, labor, materials, patents, and the cost of professionals such as accountants and lawyers, etc. It should also include the cost of the design of sample products as well as the expense to take it into production.

C) Operating Requirements

In respect of the day-to-day operations, you may have to explain about the industry's standards and regulations and describe which industry organizations or associations you prepare to join, and what you should perform to comply with the laws and regulations that apply to your industry.

Secondly, give details of your suppliers and their prices, terms, and conditions. Describe if there are any alternative arrangements you have to make if these suppliers fail to deliver. You may also explain the quality control measures that you are going to establish on your suppliers' material and your own finished products.

The aim for writing this section of the business plan is to demonstrate your understanding of the manufacturing and operating process of your business. Therefore you should carefully plan every procedure of the operation on a step-to-step basis so that you won't omit any important part of it.

Chapter 6: Marketing Plan

This section of your business plan explains how you are going to get your customers to buy your products and/or services. Strong marketing tactics can show readers that you have effective ideas for promoting and selling your products.

A) Marketing Strategy

The marketing strategy defines what customers you are targeting and how you are going to approach them. This includes the method of educating them about your product. Refer again to your "Unique Selling Point" and explain that you will get your customers to notice about this.

Describe if any new sales technique will be introduced, such as online sales ordering system through the Internet while your competitors are still using traditional retail channels.

Remember, the essence of your marketing strategy is the message you want your customers to receive about your products or services. The marketing plan is all about communicating this central message to your customers. So demonstrating to readers on how you can emphasize your selling point to your customers is the aim for this section.

B) Distribution Plan

In this section you will describe how you get the products to the end users, that is, your method of distribution and sales.

Explain what kind of salespersons and how many of them you will employ. Are they on commission basis? Are they product promoters? Are they telemarketing personnel? Describe your expectations of the effectiveness from these salespeople.

You may also need to elaborate on the management system of your sales team such as whether a sales training program is needed, any incentives they will be offered to encourage their achievements, as well as any appraisal method going to be applied.

If you are outsourcing the sales function to an external force such as sales agents or a sole distributor, describe the benefits of using these specific firms and the expertise that they can bring into your operation.

C) Advertising and Promotion

This section describes how you're going to deliver the message of your "Unique Selling Point" to your target customers. This involves both advertising and sales promotion plans.

For advertising, describe which media will be the most effective in reaching your target market and how much you have prepared for your annual advertising budget on each medium such as the Internet, television, radio, newspapers, magazines, subway banners, direct mails, etc. Besides, you can also put down your sales projections about how much business the advertising will bring in.

As for sales promotion, you may want to incorporate marketing materials into your plan, such as free samples, coupons, displays, brochures and pamphlets, etc. Any publicity activities like press releases, product launches and trade shows can also be introduced in this area.

Chapter 7: The Management Plan

The Management Plan describes your management team and staff and how your business is structured. Readers will be looking to see not only who's on your management team but also how their skills will contribute to the success of the business.

A) Ownership Structure

This section describes the legal structure of your business. You have to explain whether your business is a sole proprietorship, a partnership or a limited liability company. For partnership and limited liability company, you have to identify who will hold what percentage of ownership within the structure.

B) Internal Management Team

The Internal Management Team section will describe the key positions required to manage the core business within the organization, identify who will have responsibility for these positions, and outline their expertise. These people may include the board of directors, the chief executive officer, the chief financial officer, and controllers for different departments.

Most businesses have various departments to perform different functions such as sales, marketing, administration, production and accounting, etc. Some companies may need additional departments such as research and development as well as human resources. In fact, some key management people, especially directors, may fill up more than one of these roles as department heads. In this section therefore, you will have to identify these key people and explain which role each of them will fill. Sometimes you may wish to present this by using an organizational chart. You can also attach complete resumes for each member of the management team as appendices to your business plan.

Furthermore, You can talk about how your management team will be remunerated. What salaries and benefits will they receive? Are they entitled to any profit sharing or any other emoluments? Indicate if there is any work contract the business may offer to any of these key members.

C) External Management Team

Apart from your internal management team, your business may use external management resources. These resources somehow act as your internal management team's backup. Usually there are two main types of external resources you will procure, which are Professional Services and an Advisory Board.

The Professional Services represent external expertise that most businesses will use such as accountants, bankers, lawyers, IT consultants, business consultants, management trainers, etc.

An Advisory Board is like a mastermind to the management. The members of this board will provide your organization counsel to run the business effectively. They may be some senior or retired executives or entrepreneurs who have run this type of business for years and are only serving your company in part-time or ad-hoc basis. Their function is simply to provide expertise that your internal management team lacks. List out their names, titles and experience, and explain how each advisor will contribute to assist you to run a profitable business.

Chapter 8: Financial Plan

This is the last part of your business plan. The financial plan is the section that determines whether or not your business is feasible, and is an important element in deciding whether your business plan will attract any investment to your business idea.

Ultimately, the financial plan will comprise three financial statements: the cash flow statement, the profit and loss statement and the balance sheet. You will also indicate in this section that you have evaluated the risks associated with your business and the funding capital that you require.

Before constructing the three financial statements, mention about the risks that your organization will encounter during the course of your business as an opening scene.

A) Risks

All businesses contain their own risks. The approach to determine risks in your plan indicates that you have carried out extensive and reliable market research and this will make your plan look more realistic and appealing to the readers.

Things listed below are possible risks that a business would face typically:

  • A large cut or promotion by a competitor
  • An important customer drifted away
  • The economy goes downhill
  • Your suppliers increase their prices
  • Your suppliers fail to deliver on time
  • A better product launched by your competitor
  • Scarcity of qualified labor

Put in all assumptions about the risks that you may face during the course of business. List out the actions that you are prepared to take in order to handle these risks. This will increase your credibility in front of the readers since you have demonstrated that you are alert to these issues and be able to overcome them.

B) Profit and Loss Statement

The Profit and Loss Statement is the very first statement you have to create out of the three financial statements in the Financial Plan section. This statement records revenues, expenses and cost of goods sold. The bottom line is how much profit or loss your business will make at the end of the accounting period.

First, input your revenue from which you have generated in the Sales Forecast section earlier in the business plan. If you are in a manufacturing business, the revenue will be called sales, and cost of goods sold will need to be accounted for. Next, you will need to gather the financial data on all expenses, including your start-up cost and your operating expenses. The difference between revenues and expenses is therefore you gross profit before taxation. Net profit will be the bottom line after subtracting taxation and/or dividends distributed to equity owners.

Appendix 1 is a worksheet of a standard Profit and Loss Statement structure.

C) Cash Flow Statement

A cash flow statement illustrates how much money will come into the business and how much money will be flowing out during the financial period. In another sense, it shows readers how much money you will need and when you will need it from time to time during the course of business.

Generally, only cash items will be accounted for in the correct accounting period. For example, Sales made last month in credit (account receivables) may be collected this month and the statement will only record an inflow for such when it is received.

The cash flow projection is an important tool for cash flow management, letting you know when you might want to arrange short-term finance as well as to seek for long-term capital injections.

There are three elements included in the cash flow statement: the cash revenues, the cash disbursements, and the reconciliation of cash revenues to cash disbursements. The reconciled balance will be exactly equal to the cash balance recorded in the balance sheet at the end of the financial period.

See Appendix 2 for a worksheet of the Cash Flow Statement Outline.

D) Balance Sheet

The balance sheet is created only once a year to determine the net worth of a business. It is the last part of the three statements in the Financial Plan section. The balance sheet represents the business's financial status at a particular point of time. It is divided into three main categories: the assets, the liabilities, and owner's equity. Assets are tangible and intangible objects that are in the ownership of the company. Liabilities are debts owed to creditors and suppliers. Owner's equity is the net difference when the total liabilities are subtracted from the total assets.

Once you have your balance sheet completed, you can write a brief analysis for each of the three financial statements. Keep them concise and cover the highlights. The financial statements themselves can be either displayed in this section or as appendices to the business plan.

Appendix 3 is a worksheet of a Balance Sheet outline.

E) Funding Request and Return

This comes to the last part of the business plan. In this section you will clearly state the amount of funding whether in debt or equity for the investment you will need. Indicate when the money is needed in different phases, and tell the investors what they will receive in return for their capital.

Lastly, suggest an attractive exit strategy that you will apply, that is, how investors will get their money back. Often, it can be accomplished either by a cash-out option in five years or an IPO (Initial Public Offer) plan when the business has achieved its target profit over the foreseeable period.

As you can see, writing a business planning is not easy at all. However, by following these critical steps provided from all of the chapters above, you will ensure your business has a fine chance at seeking funds from investors and success in the future.

Appendix:

Disclaimer:

This content is provided and written by Di & Cooke Company Limited who has granted permission to the Hong Kong Polytechnic University for the use of this material to support the learning and development of all the participants who have entered the PolyU Innovation and Entrepreneurship Student Challenge. Participants should take such materials and sample plan as reference only.

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