Tuesday, September 13, 2016

Necessary Components of an Effective Business Plan [Part 1-3]

Having to write a business plan is the most important facet of starting a business. Consequently, it’s also the greatest deterrent. Fear not. 
WHEN STARTING A BUSINESS, the very first thing you should have is a business plan. The business plan has several purposes. It’s a good way to put ideas on paper and keep track of the steps you’ve taken to start the business. 
It’s also a major requirement in acquiring financing for your business.  
No one is going to want to give you any money to help you start your business unless you can prove to them that you have a plan to keep your business from crashing down soon after takeoff. Below, you will find a series of sections that make up a basic business plan. 
If you already finished this post, here is second part of Necessary Components of an Effective Business Plan

The EXECUTIVE SUMMARY is the first part of a business plan and is the most crucial piece of your plan.  It provides a very descript synopsis of the entire plan, along with a brief history of your company.  This portion of the plan tells readers where your business is and where you want to take it.  It's the first thing your readers see; therefore, it is the thing that will both grab their attention and make them want to keep learning or make them want to close the cover and move on to something else.  Most importantly, this part of the plan conveys the message of why you believe your business will be successful. 

Here’s a tip:  The executive summary is most easily and effectively written at the end of your efforts of planning and writing the business plan.  Once all of the details of your plan are in order, you will be prepared to condense it into the executive summary. Try to keep this section to fewer than four pages. 

Included in the Executive Summary are:
  • Mission Statement:  The mission statement briefly explains the focus of your business.  The statement can be any length as long as the point is conveyed and understood.  It should be as direct and to-the-point as possible and it should leave the reader with a clear picture of what your business is all about
  • When the business was started
  • Key management and their roles
  • Number of employees
  • Primary location of the business and other satellite locations
  • Description of office, manufacturing plant, or facilities
  • What are the products or services
  • Current investor information and any additional financial relationships or arrangements
  • Brief summary of the company’s financial accomplishments and any noteworthy market activities (e.g., your business tripled its value in a one-year period or you became the leader in your industry by developing a certain product)
  • Briefly describe management's plans for the business’ future.  With the exception of the Mission Statement, the information located in the Executive Summary should be represented in a brief or bulleted style.  Note that this information is expanded upon in greater detail within the remainder of the business plan

It’s not uncommon that if you are just starting a business, you, most likely, will not have a lot of information to populate the fields mentioned above.  As an alternative, focus on your experience, background, and the decisions that led you to start the business.  Ensure that it contains information about the difficulties your target market has and what resolutions your business will provide.  Explain how the business you have will allow you to make meaningful advances into the market.  Advise your reader what you're going to perform uniquely or more effectively than your competition.  Assure the reader that there is a definitive need for the product or service provided by your business, then go ahead and address the business’ prospective plans.

To help the reader in pinpointing specific sections within your business plan, provide a table of contents immediately following the executive summary.  Be confident that the content titles are very broad; try not to include too much detail.

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The MARKET ANALYSIS portion is Part 2 of a well-written business plan. This part of the plan should demonstrate your knowledge regarding the particular industry that your business plans to engage. It should also provide basic statistics and key information of any marketing research data you have obtained; however, the itemized details of your market research studies should be placed in the appendix section of the business plan.  The market analysis portion of the business plan should include a description of the industry, target market facts and information, market test results, timeframes and an evaluation of your competition.

Within the market analysis, the Industry Description section should include an overview of your primary industry, industry size, current and trailing growth rates, market trends and characteristics relating to the entire industry (for example, what is the life cycle stage of the industry? What is the industry’s expected growth rate?), and include the major customer groups within the industry (This can be as broad or narrow (businesses, governments, women over 35 years of age, children under 5, etc.) depending on the size and scope of the industry and the business represented.

The business’ target market is the customer base that it wants to supply products or provide services to.  When defining a target market, it’s vital to narrow the group to a realistic volume.  Often, businesses make the fatal miscalculation of trying to offer something to everybody.  This approach typically ends in failure.

Within the Target Market section, you should gather information that identifies the following:
  • Key characteristics of the primary group you are targeting.  This segment should include information about the critical needs of your future customers, the level to which those needs are currently being met, and the demographics of the group. Ensure you also include the geographic location of your target market; identify the key decision-makers, and any seasonal or cyclical trends that may impact the industry or your business model.
  • Size of the target market.  Herein, you will need to know the amount of available customers in your primary market, the amount of annual purchases they make relative to products or services at par with your own, the geographic area they inhabit, and the expected market growth for this group.
  • The magnitude to which your business expects to obtain market-share and the reasons why.  When gathering this information, you need to decide how much market share and how many customers you expect to gain in a specific geographic region.  In addition, you should provide the reader with an understanding of the reasoning that was used in developing these estimates.
  • Pricing and gross margin expectations.  In this section, it would be wise to define the structure of your pricing, your gross margin requirements, and any discounts or incentives that you plan to offer through the business, such as large-volume purchasing, bulk discounts, or prompt payment discounts that discourage customers from taking advantage of payment terms.
  • Target market research and information sources.  These resources could be purchased demographic research, directories, business associations, industry publications, and government documents.
  • Media the business will use to reach the target audience.  The media may include internet marketing, internet radio, terrestrial radio, television, magazines, periodicals, or any other type of engaging media that has potential interaction with the target audience.
  • Buying patterns of your target market.  The first step is to identify the needs of the potential consumers, conduct research in order to address their needs, review the possibilities, and identify the person or persons that can select the most effective solution.
  • Trends that affect the potential customers, coupled with fundamental features of the subsequent markets.  As with the primary target market, it is important to pinpoint the needs, demographics and developing trends that are going to affect the secondary markets later.

Including information about any of the market tests already completed is important to include in the business plan.  Specific details should be included in the appendix.  Market studies usually include the target customers who were contacted, all data or information that was provided to prospective customers, how critical satisfying their needs really are, and the target market's willingness to purchase products or services at a blend of different price-points from your business.

Lead-time is the required amount of time from when a customer places an order until the moment the product or service is delivered.  When you research this information, determine your lead-times regarding initial orders, re-orders, and bulk purchases.

While conducting a competitive analysis (SWOT Analysis) it is critical to identify the competition’s product-lines or services and market segment. Use this information to determine their strengths and weaknesses, understand the relationship between your target market and your competitors, and identify any roadblocks that may interfere with you entering the marketplace. Also, be certain that you identify all of the primary competitors for each of the products or services offered.  For each key competitor, determine their market share; try to predict when new competitors will enter into the marketplace.  In fewer words, how long will your window of opportunity last?  Finally, pinpoint any additional or less impactful competitors that may have an effect on your business succeeding.

The strengths or competitive advantages realized by your competition’s organization can become advantages that you too provide.  These strengths can be found in many different areas of the business. They typically include:

  • An ability to service the customers needs
  • The holding of a great deal of market share (consumer’s brand awareness comes with that)
  • Years in business as a trusted organization
  • Great financial position, ensuring that they can survive as a business through thick-and-thin
  • Exceptional management or personnel

Weaknesses are easy to understand as they are simply the opposite of strengths.  However, it is important to analyze the same areas as you did prior to determine the weaknesses of your competition.  Do they satisfy the needs of their customers? What is their current market penetration?  How well do the target audiences and the public view them in regard to past-performance, trust, and reputability?  Are they experiencing financial constraints or limitations?  These could all be red flags for any business.  If you discover weak spots in the competition, try to develop an understanding as to why the problems exist, leaving you with the ability to avoid them.

In the event that target audience is not shared by your competition, you should be able to grow your idea with little resistance.  However, if the competition is hungry for your target market, too, you should plan to handle the known roadblocks on your way to success.  Some issues you may uncover include:

  • Large start-up costs
  • Time required to get your idea off the ground may be significant
  • Constantly evolving technologies
  • Shortage of skillful personnel
  • Customers are unfamiliar with your company, product or service
  • Current intellectual property laws such as trademarks, patents and trademarks inhibit your ability to innovate

The last section that requires research is the section covering restrictions and regulations.  This includes information related to employees, customers, government regulation requirements, and any other future changes.  Important items that need to be addressed include: steps necessary to conform to the requirements that are going to affect your business, as well as the timeframe required, such as: When does your business have to be in compliance?  On what date do these changes take effect? What will it take, in regard to labor and expenses, to conform to these issues?

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COMPANY DESCRIPTION is Part 3 when compiling a business plan. While keeping the finer details limited, provide the reader with a brief understanding of how all of the different components of the business work in conjunction with one another. A company description typically provides information about the fundamentals of the business along with a breakdown of the key factors that will lead to the business’ success.  When providing the fundamentals of the business, it is important to include detail on the needs of the marketplace that you are trying to satisfy.  Ensure you provide detail on the initiatives that you expect will satisfy these needs.  Lastly, provide a breakdown of key individuals and major organizations that have these needs.

Fundamental factors of success typically include an ability to satisfy your customers' needs better than the competition, time and cost-effective processes of providing products or services, valuable personnel, and quite often, a prime location.  Any, or all, of these provides businesses a competitive advantage.

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If you already finished this post, here is second part of Necessary Components of an Effective Business Plan


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