How to Write a Business Plan

One of the more common subjects that new business owners ask about is “how to write a business plan?” To help you with this task, let me first clarify what business people usually mean when they use the term business plan and then provide some suggestions and point you to resources that you can use to make the work of writing a business plan easier and more successful.

Defining Three Types of Business Plans

People use the term business plan to refer to three distinct items: a firm’s overall strategy and roadmap (which I’ll call here a “strategic plan”), the 20-, 50-, or even 100-page document that a new business owner uses to prove to him- or herself and others that he or she has thought carefully about starting or growing a business (which I’ll call here a “white paper plan”), and the 10- to 20-page document that entrepreneurs use to promote a new venture to investors and other key stakeholders (which I’ll call here a “new venture plan”).

Strategic Plans

I talk about business strategic planning in another short article, so I won’t repeat that discussion here. Let me note here, however, that a strategic plan is something quite different from a new venture business plan or white paper business plan.

White Paper Plans

If you want to write a white paper plan, know that this process is well documented elsewhere. You can get a detailed outline for a white paper plan, for example, from the United States federal government’s Small Business Administration Web site at www.sba.gov.

If you have access to Microsoft PowerPoint, you should also know that PowerPoint’s AutoContent Wizard supplies a detailed template for creating a white-paper-style business plan presentation.

Note that white paper plans would typically need to include a business pro forma such as you might produce with the business plan workbook (Excel workbook download).

New Venture Plans

If you want to write a new venture plan, you take a different approach. New venture plans, boiled down to their very essence, answer the following five questions that prospective investors need to answer in order to decide whether they should invest:

• Is a firm’s product or service feasible? For example, can the technology really be developed? Is the necessary legal and regulatory approval obtainable? Does the process work in practice? Obviously, if a firm is already operating, this question doesn’t need to be asked and answered. But for many types of new ventures—especially technology companies—the question does need to be discussed.
• Do customers want the product or service? In other words, is there true demand? This might sound like a silly question, but potential customers ignore many interesting and seemingly useful products and services.
• Is the basic transaction profitable? In other words, will people pay a price that produces a profit? Customers might want products and services at a price that firms can’t afford to provide.
• Is the return on investment adequate? Even profitable businesses might not be feasible if they require too much capital relative to the profits they generate. New ventures not only need to be profitable, but they also need to produce acceptable returns on investments. This return on investment measurement might be measured with either an internal rate of return, which is probably most common, or a net present value, which is most accurate. Note that an input to any return on investment calculation—the investment required to start the venture—is also an important factor in any prospective investor’s deliberations.
• Can the management team operate the business? Even if you can answer “yes” to the first four questions, that’s not really enough. A new venture will probably fail if the management team lacks the skills to successfully run the business. So the last part of a new venture plan needs to describe the management team and why the’re likely to succeed. The ideal answer to this question is, of course, to be able to show through past performance that the management team has successfully run a similar business.

I think you could use these questions as the highest level headings in a new venture plan. The only other headings you might want to add to such a new venture plan would be for an introduction and an executive summary.

Here are three final observations about new venture plans: First, it’s very unlikely that an entrepreneur can honestly answer “yes” to all five questions.

Many new venture plans do, of course, give yes answers to all five questions. But I suggest that an honest answer such as, “we don’t yet know,” or “it depends on future developments,” will attract better and more sophisticated venture investors and increase your chances of success.

I also note here that in the recent dot-com hysteria, many new ventures were funded even though they could honestly answer yes to only the first question. (Of course, many shouldn’t have been funded, but that’s another topic.)

Second, answering “no” to any of the five questions means the new venture won’t work. Each of the five questions is a link in the chain of success. Break a link and the chain breaks, too.

Third, a business pro forma, such as you might build using the business plan workbook (see link above) needs to be part of or an appendix to your new venture plan. By creating a detailed five- or ten-year forecast, you back up your answers and provide more detail to the people reading, and potentially funding, your new venture plan.

If you’re interested in getting help with writing a business plan, feel free to contact our office for a consultation.