business plan: how to write it
January 6, 2020

Productivity

Writing a business plan (Part 1)

By Alexander Sergeev

A business plan is a document that describes all aspects of the future enterprise, analyzes all the problems that it may encounter, as well as identify ways to address these problems. The final business plan should clearly answer the question of whether it is worth to invest in this business and if it pays off all forces and resources expended.

It’s very important to execute it in accordance with certain requirements, which are discussed below and make special calculations. This helps to identify future problems and to understand whether they can be overcome and whether it is necessary to ensure in advance. Writing a business plan is the first step of every beginning entrepreneur in the field of software development, innovation, economic, commercial or investment activities.

The structure of a business plan and recommendations for writing it

1. How to write a brief summary of the business project

The first two sections of the business plan – “Brief summary” and “The basic idea of the project” are introductory and, if taken separately, can serve as a brief investment proposal, which you can distribute to your partners and investors in the preliminary stage of negotiations.

The section “Brief summary” is last to be compiled and contains a concise summary of the essence of the project and features of the most important indicators.

An indicative list of questions for a brief summary:

  1. What goods and services will produce and provide your company? Who is your buyer?
  2. What is the expected volume of sales (sales revenue) for the first year?
  3. What is the sum of all costs for the project?
  4. What is the legal form of the enterprise?
  5. What is the number of employees?
  6. What amount of funding required for the project?
  7. What are the sources of funding for the project?
  8. The main parameters of the project: the total profit (income) for the period, net cash outflow at the end of the first year and profitability.

This is perhaps the most important part of the business plan, as potential investors and partners read it first. That brief summary, if written correctly, allows you to quickly understand the nature of an enterprise and in case of interest, move to a more detailed study of the other sections of the business plan.

In the text of the brief summary, it is important to give extremely brief answers to the list of the mandatory issues: composition, content, financial and economic parameters (including comparable cost-benefit assessment, efficiency, return on the investment for the project), technology, methods, timing and features of your businesses.

A brief summary of any project should not be more than one page.

2. How to describe the business idea of ​​the project

The section “The basic idea of the project” should in a simple and concise manner explain the basis of the real possibility of creating a new enterprise. It is required to describe the business idea of the project.

An indicative list of questions for “The basic idea of the project”:

  1. What is the primary goal of the project (business ideas)?
  2. What specific problems must be solved to achieve this goal?
  3. What problems will hinder the successful solution of problems in your enterprise? How can these challenges be overcome?
  4. What specific actions and in what time frame you intend to take to achieve the objectives of the project?
  5. What arguments can confirm your confidence in the success of the project?

SWOT-analysis helps to study the strengths and weaknesses of the project. SWOT is an abbreviation for the initial letters of the English words: Strengths, Weaknesses, Opportunities, and Threats.

Thus, SWOT-analysis is a definition of the strengths and weaknesses of the enterprise, as well as opportunities and threats emanating from its environment. The external characteristics are those that the company can not change, but can create a set of measures to address these problems.

The internal factors during the SWOT-analysis are such parameters as product quality, customer service, additional service, product versatility, the level of management of the company, staff qualification, etc.

The external factors are the growth rate of the market, changes in customer solvency, the level of direct and indirect competition, changes in legislation, policy changes, etc.

The section “The main idea of the project” usually does not exceed 1-2 pages.

3. The marketing part of a business plan

3.1. Types of goods and services

This section of a business plan describes the products and services you want to offer to prospective buyers. You must determine and submit in a business plan the benefits of your products that meet the desires and needs of the customers and are not satisfied by the same items of competitors.

The main purpose of this section is to prove that your products (services) have value for customers and will be in demand.

The basis of this section is the following list of questions:

  1. Which product (service) you offer your customers?
  2. What needs will satisfy the product or service provided?
  3. How carefully are your products designed? Do you have a patent on this product? Do you have experience in the production and sale of these products?
  4. In what areas it can be used?
  5. What is the advantage of your goods (services) in terms of the potential buyer?
  6. Why should buyers give preference to your product (service)?
  7. What are the disadvantages of your product (service), and how will you try to overcome them?
  8. What features make your product unique?
  9. How will your products or services be provided to the consumer?

3.2. Sales market

The purpose of this section is to show that you can sell your product. You need to explore the market and identify potential clients, as well as predict their demand for your products at your price.

You must demonstrate that the market for your product (service) does exist and that you can take advantage of the opportunities that it provides.

You should make a general description of the market, which includes the following key features:

  1. An estimate of the size and composition of the market, including distribution by geographical area and the main types of customers;
  2. Position in the market at the moment and its proposed development: will grow, remain unchanged or some other scenarios;
  3. Mechanisms of action of the market and the main types of competition: price, quality, service, reputation.

Then you need to analyze the market segment in which you sell your goods. The market can be segmented by geographical positioning, types of buyers, goods, and services.

For you, as a budding entrepreneur, having no experience of previous sales, it will be difficult to analyze the market and you’ll have to act on the basis of reasonable assumptions, personal observations, and experience from similar businesses.

What sources can be used for market research? It may be reference information in trade and professional journals, reports in the press and media information sources presented on the Internet. It is also recommended to use personal observation, opinion polls of prospective clients and competitors.

To find the approximate number of customers and the expected demand for your product, you need to answer the following questions:

  1. Where (in which area) your future customers live?
  2. Who is a future buyer of your products (age, sex, social status, occupation, the level of income, etc.)?
  3. What considerations did you follow while selecting a particular group of customers (market segment), that will be interested in your product?
  4. At what price you can buy the same product nowadays?
  5. How changeable is the demand for these goods (services)?

3.3. Competition

This section should describe your potential competitors, their strengths and weaknesses:

  1. Which of the companies-competitors operate in your market segment?
  2. Which of them produce products or services similar to yours?
  3. What is their product – its features, design, etc.?
  4. What is their level of prices for goods (services)?
  5. How do your competitors find their customers – advertising, marketing channels, other forms of promotion?
  6. Which of the companies-competitors are located in the neighborhood?
  7. How do your competitors develop their business? What are the reasons of changes: increasing or decreasing the volume of production, broadening or narrowing the range of goods, increasing or decreasing the number of employees?
  8. What competitive advantages will your products (services) have over the other manufacturers of similar goods (services)?

You should keep in mind that a thorough analysis of your competitors will help you to avoid mistakes and to use their successful experience in your work.

In conclusion, it’s useful to make a comparative analysis of your main competitors, filling in the following table:

Competitors Characteristics Conclusions
Strength Weaknesses
Your enterprise

3.4. Sales forecast

Having studied the market, try to forecast sales of your product for the first year. The forecast should be made with a monthly breakdown. It is necessary to take into account the seasonal factor (if any), your share of the market considering the competition, your production capacity and other factors that may be significant.

The sales forecast should be made for three scenarios (pessimistic, optimistic and realistic), placing it in the table below:

The presentation of the information on the sales forecast

Realistic scenario
Period (month) 0 1 2 12
Quantity of goods
Price of goods
Volume of production
Pessimistic scenario
Period (month) 0 1 2 12
Quantity of goods
Price of goods
Volume of production

Note: Here and in all other tables, you should stick to a particular time scale, i.e. any plan should be made with a monthly breakdown by periods.

For the option “realistic scenario” assess the possible risks, seasonality, other significant moments for your case and select the most probable figures. As a rule, they lie between the minimum and the maximum figures.

Complete filling a table with the worst case (pessimistic scenario), indicating the volume of sales for the case when things go wrong.

3.5. Marketing plan

A marketing plan or a plan to promote goods (services) should give a description of your program of action for bringing goods (services) to customers and calculate how much money will it take.

In this section, you must determine:

  1. How will buyers know about your products?
  2. How much money do you intend to spend on advertising?
  3. How will you sell your product?

Determination of prices

Price may be based on the following conditions:

  1. Competitors’ prices for similar or substitute goods
  2. Prices determined by the demand for this product
  3. Product cost + target profit

The unique qualities of the goods

Pricing method “product cost + target profit” is based on the definition of all business costs and the minimum price level to cover them, considering the rate of profit the entrepreneur wants to get to the money invested.

According to the analysis of competitors’ prices, the average price of goods is determined. The maximum possible price is set for the goods of high quality and with unique advantages. Demand-driven prices may vary over the entire range – from lowest to highest figures. In any case, it is necessary to set such prices on your products and change them depending on the situation in the market, to acquire a certain share of the market and get the target profit.

Marketing plan

This section should describe how you intend to sell products and services: on your own or through the intermediaries, wholesale or retail, by telephone pre-orders or otherwise.

Your task is to facilitate the process of making a purchase for your client, make your product available to him.

Advertising plan

This section should describe how you will provide information about your products (services) to your customers.

You should decide on the following matters:

  1. Will you advertise your product or service?
  2. What information about your products and services is necessary?
  3. Where do you want to place your advertisement?
  4. How much money do you want to spend on advertising?

For a more convenient presentation of the marketing program in your business plan, you can fill in the following table:

The presentation of the Marketing plan

Product (qualities required) Here you should describe the specific consumer characteristics of goods (services), which are important for a particular group of customers.
Prices Here you should specify the optimal level of prices for goods (services) taking into account the level of supply and demand, competitors’ prices, product cost, and other factors.
Sales channels Describe the methods of realization of your goods (services): on your own or through the intermediaries, wholesale or retail, by telephone pre-orders or otherwise.
Promotion and advertising Describe how you will provide the information about your products (services) to your customers: via advertising mail, newspaper advertisement, radio advertisement billboards or any other methods.
Marketing costs Which costs requires a marketing program that you have described in the table.

The total volume of the marketing section is highly dependent on the characteristics of the project (the variety of activities, the breadth of the range of goods (services), the number of competitors, the need for a more detailed description of marketing activities, etc.), but usually no more than 5-10 pages. In order not to overload the text of the explanatory note with the details of the marketing plan, they are usually converted into a separate application to the business plan.

In the marketing section of the business project, it is recommended, as a minimum, to submit a table with the sales forecast and marketing budget, providing links to the data sources. At the same time, it is necessary to use the breakdown periods (month), which will be involved later in the sections dedicated to costs. Otherwise, it will be extremely difficult to create a financial budget for the project and to calculate its performance.

The recommended amount of marketing section is no more than 3 pages.

4. How to justify the resources required

4.1. Description of the production capacities

The purpose of this subsection is to prove that your company will be able to produce and provide the required amount of goods (services) within the necessary time limits and with the quality required.

In business-plans for commercial enterprises, this section deals with the retail space and equipment (counters, shelves, cash registers, etc.) and for services – an office space, service area, and other major resources depending on the activity chosen.

Here you should answer the following questions:

  1. How well the location of the enterprise is chosen, based on the proximity to customers, suppliers of raw materials, availability of labor sources, transport?
  2. Which capacity is required: space, equipment, raw materials, energy? Where, from whom and under what conditions will raw materials be procured? What is the reputation of the vendor and is there already experience of work with them?
  3. Do you expect industrial cooperation, with whom, in what area?
  4. What will be the mode of operation of your enterprise?

It’s recommended to present this information in the following table:

The presentation of the information on the production capacities

# Name of production capacity The current condition of production facilities Additional needs and activities to address them Guide price Month of acquisition
1 Premises
2 Equipment
3 Raw materials
4 Energy sources

 

In “Premises” you provide the information on production facilities, their location, and characteristics, as well as preliminary information on the conditions of the lease.

In “Equipment” you should show your equipment needs in terms of money, tell about plans of its receipt. The rest of the lines are filled in a similar way.

4.2. Depreciation of the production assets

The equipment used in the manufacture of your goods or services loses its value due to physical deterioration and obsolescence.

Depreciation (or amortization) is a component of cost of products but is not a reason for the outflow of real money. The most widely used mechanism for straight-line depreciation is when the annual rate of depreciation is set based on the life of the equipment.

The initial cost of the equipment is the price at which the equipment was purchased. Carrying value or Residual value = Initial cost – Accumulated depreciation.

Depreciation on leased assets is charged by the landlord (or the leasing company). In the latter case, the depreciation in the financial part of the business plan is not required.

If you are going to use your own equipment, it’s recommended to use the following table for the preparation of the initial information:

The presentation of the information on the depreciation of the production assets

Period (month) 1 2 3 12
The total value of the production assets
Depreciation
Carrying value
Accumulated depreciation

4.3. Costs of raw materials

The purpose of the subsection is to prove the material costs of producing goods (services).

In this section, you should:

  1. Write an enlarged list of necessary raw materials, semi-finished products, components, main and subsidiary materials, spare parts and specifications of their consumption per unit of finished goods.
  2. Characterize the alternative choices of possible suppliers and choose the best option for which to provide information on supply conditions (price, delivery, schedule and financial conditions of supply measures for the storage and warehousing).

4.4. Staff and labor costs

This section should justify the need for personnel of your company. Decide whether you need to hire employees, if so, please describe:

  1. What is the need for staff at the moment?
  2. What professional practical experience needs your company?
  3. Where can you find these people?
  4. What will be the mode of operation of your company and your employees?
  5. What remuneration system you intend to introduce: time-based, piecework, fixed salary, mixed one?
  6. Whether you will use a system of bonuses and benefits?

An entrepreneur have no fixed salary, because, in fact, his salary is his income. But the salaries of the staff affect the product cost.

In addition to salaries, product cost is affected by social calculus (unified social tax) on the wages of hired personnel, which, if you use the accompanying CD-ROM templates of the financial part of the business plan will be calculated by a computer program.

4.5. Current expenditures

In this section, you need to collect in one table all the current expenditures associated with the production and sale of your goods (services). In addition to presented in the previous sections costs for raw materials, depreciation, and salaries, you should not forget about the so-called overhead costs of your business.

Not to miss anything, it’s recommended to use the following table:

The presentation of a summary of current expenditures

Period (month) 0 1 12
Raw materials[1]
Wage fund
Acquisition of subsidiary consumables
Business trips
Communication services
Public service
Payment for the services of outside organizations
Lease of premises
Other current expenditures, including:
Office expenses
Repairs and cleaning
Marketing costs
Contingencies
Total amount of current expenditures

Notes:

Marketing costs must comply with the marketing budget, previously settled in the marketing plan.

Expenditures on the acquisition of fixed and intangible assets are not included in current costs and are to be included in the capital costs (see section 4.2)

Charges on wages (unified social tax) are calculated in taxes (see notes on drawing up the financial section of a business plan).

4.6. Consolidated calendar schedule of the project implementation

The purpose of the subsections is to bring together all the key activities aimed at implementing the project of your enterprise.

Consolidated calendar schedule of the project can be represented as follows:

The presentation of the consolidated calendar schedule of the project implementation

Period (month) 0 1 12
Activity 1
Activity 2
Activity 3
Capital costs

The volume of the production section of the business plan differs for various industry sectors (for manufacturing companies it is larger, and for services and trade it is smaller), but usually does not exceed 5 pages.

5. How to submit data on the legal issues of the business organization

5.1 Choosing the legal form of the enterprise

In this section, you need to gather information related to legal support of business, and to justify your choice of organizational form.

In this regard, in legal terms, you need to answer the following questions:

  1. What legal status is most suitable for your activity? Justify your choice.
  2. Is there a possibility of changing the form of the enterprise in the future?
  3. What permits are required for the implementation of your activity: license, trade permission, certificate of conformity, hygienic conclusion, coordination of inspections? Describe the order of their receipt and justify the estimated size of the cost.
  4. What are the initial costs required for registration of the enterprise?
  5. How the transaction with suppliers and customers will be handled, as well as labor relations (if hired personnel will be involved)?

5.2 Organizational plan

In this section of the business plan you must study the following questions:

  1. Information on the administrative board of the enterprise, the distribution of duties and responsibilities.
  2. Experience in the field of business.
  3. Sources of professional support.

It happens that at the initial stage, the head of the firm concentrates all the administrative functions in his hands: accounting and finance management, supply and sales management, price control and promotional activities.

But as the company grows, it becomes difficult for one person to keep track of everything and you need assistance in the management of the firm. Then it is necessary to determine exactly what specialists you will need for effective management. For convenience, you can draw a diagram that clearly spelled out who does what, who reports to whom and who makes the final decision.

Experience in the particular field of business

In this part of the business plan, you should describe your work experience in the area in which you intend to use it. And it concerns both the experience of economic activity and the experience of being the leader. You should not forget the experience which you have received, being a leader or organizer of social events.

Sources of professional support

Any business, regardless of its activities and dimensions, must hire the services of an accountant, lawyer, bank, insurance company, etc.

Better to make inquiries in advance, choose the best of what you can afford, establish contacts and include yourself in the number of potential clients of these organizations. Describe how will you act in this direction?

The usual amount of organizational and legal section is 2 pages.

See the next steps here: Writing a business plan (Part 2).

 

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