Basi on Finance: Putting together a strategic business plan
A well-written strategic business plan is essential to the capital-raising process for your company. It is a way for an investor, whether a venture capitalist or other provider of funds, to review your company's potential. Today, most investors and banks will not even consider putting money into your company without first seeing a strategic business plan.
A strategic business plan is also a management tool. It can help you focus in a logical and organized manner on the future growth of your company. It also permits you to monitor and assess progress. Every company should have a business plan and should review it and update it each year.
Obviously, you cannot begin to write a strategic business plan if you cannot describe the business you are involved in. The first section of a business plan is more comprehensive than a simple description. It should include the specific business you are in; the product you sell; the customer base you serve; the background of your business, including a short history of who started it, the highlights of its progress and the roles of the personnel over the years; and the current ownership of your company.
Market analysis and product reviewOnce you have written and developed the background for the strategic business report, you can move on to the market analysis section. An ongoing business that wants to understand the market for its products or service a new market will need to show the need for the product in the target area. Your objective is to convince people that you understand the potential customer's needs; your product meets that need; and you can see your product at a profit. If you cannot show these three things in your market analysis, you will never persuade anyone to invest in your company, to loan you money or to work for you.
Other areas to address in the market analysis section are:
- Who are your customers?
- Why do they buy?
- What are their expectations for price, quality and service?
- How about your competitors? Do you know the market share of each?
- How does your product compare in price, service and warranties?
- What are your competitors' strengths and weaknesses - financial, marketing and operational areas of management?
One of the easiest ways of showing comparative data on competition is to use a matrix. An objective appraisal of your competition will add significant credibility to your strategic business plan.
Obviously, in order to operate any business, you must have understanding of the products being sold. In many instances, individuals get involved in business because they believe they can make money in that particular operation and because they have knowledge about the products.
Areas that should be detailed in the strategic business plan concerning your products are estimated sales and market share; pricing strategy; how and where you plan to sell your products; and how you plan to promote your products and services.
Management and organizationOne of the major points of a strategic business plan is management-team members. This section of the business plan should include:
Space requirementsA strategic business plan must be realistic about how sales as they relate to space requirements. Increased sales means more inventory. This, in turn, requires more space to store and more people to handle it.
A complete strategic business plan will detail how the space will be acquired if sales are expected to increase. Ask yourself the following:
- Is my current space large enough to handle my projected sales?
- Where will I acquire extra warehouse space?
- How will I pay for more workers?
- Will the extra costs bring a greater profit?
Financial informationFunding needs must be documented by reliable financial statements that show an overall asset and debt structure on a current basis, together with the operational aspects of the business. Once that has been completed, the next step involves forecasting. A strategic business plan will need financial statements and projections for the next one to three years, including a projected statement of operations, cash-flow statements, pro forma balance sheets and a break-even analysis.
Your projections should be tied to your market expectations. It is extremely important to clearly state the assumptions you use when preparing the pro formas and projections. Your financial analysis should identify and support the amount of money you are seeking from potential investors or bankers. This section requires some knowledge of accounting and finance; if you do not have the expertise, get some outside help.
MoneyThis section of the plan should indicate the amount of money you will need, when you will need it, and how it will be used. You should ask yourself questions such as:
- How much money do I need now?
- How much will I need over the next one to three years, and when?
- What will I do if I have underestimated the amount I need?
- How will I use the initial funds?
- What portions of the funds will be debt vs. equity?
- What will the terms be?
You should always address your plans for cashing out the investors or paying off the debt. Lenders want to know how long you plan to have outstanding debt. A bank is much more likely to commit the funds to your business if the payoff has been incorporated into the initial plan. The end result should be cash-flow projections for one to three years.
Plan summaryThe plan summary appears first in a strategic business plan. However, it should be the last section you write. and should highlight key elements of the entire strategic business plan highlighted above.
A strategic business plan should be extremely organized. The plan should have a table of contents, and tabs should be used to identify the major sections. Make it easy for investors and bankers to turn to the sections in which they are the most interested.
Have others review the plan before sending it to investors or lenders. Individuals in the best position to provide you with constructive comments include other entrepreneurs, your accounting and business advisors and your attorney. Ask them to give you an objective viewpoint on how the plan will come across to disinterested individuals.
A final word of caution is the confidentiality of the plan. Remember, your strategic business plan is going to contain very sensitive and confidential information, such as your tax returns and financial statements. Therefore, you should carefully control its distribution. By using a loose-leaf format, you can add or delete sections, depending on whom you want to see the plan.