essential elements of a good business plan

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12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

• The name and location of your company
• Products and services offered by your company
• Mission and vision statements
• Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

• Business location
• The legal structure of your business
• Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

• The geographical location of your target market
• Needs of your target market and how your products and services can meet those needs
• Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

• Industry description and statistics
• Demographics and profile of target customers
• Marketing data for your products and services
• Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

• Your competitors' identified advantages in the market
• How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
• The standout qualities that distinguish you from other companies
• Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

• Information about how your company plans to carry out its operations.
• The base location from which your company intends to operate.
• The number of employees to be utilized and other information about your company's operations.
• Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

• Projected income statements
• Cash flow statements
• Balance sheets
• Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

• Legal documents
• Licenses and permits
• Credit histories
• Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

• The management team and other stakeholders resume
• Marketing research
• Permits and relevant legal documents
• Financial documents

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6 essential elements of a good business plan

Entrepreneurs, executives and venture capitalists discuss how to craft a business plan that will impress investors and be a good road map for your company..

Whether you are just starting out and need startup investment or are looking to expand your business and raise capital, a business plan is a must. Indeed, a business plan is not only essential if you want to get people to invest in your idea, it can help you articulate what it is you hope to accomplish with your business – your mission, goal(s) and values – and plot the company’s growth trajectory.

However, to be successful, a business plan cannot just be a bulleted list of an entrepreneur’s thoughts and musings, hopes and dreams. It needs to be a serious business document with the following six elements.

1. Executive summary

“An executive summary is the ‘elevator pitch’ of your business plan,” explains David Mercer, founder, SME Pals , a blog dedicated to helping entrepreneurs. “More often than not, landing a new investor relies on hooking them with a great elevator pitch. Without grabbing their attention, your business plan, no matter how well researched and presented, may not stand out enough.”

The executive summary should, in brief, describe the “problem you are going to solve, and why that problem needs to be solved right now,” by you, says Peter Arvai, CEO, Prezi presentation software. “If you aren’t able to communicate that deeper purpose to others, you will have a very hard time convincing investors to fund your idea and people to join your team.” 

Tip: Write the Executive Summary last, after you’ve done all your research and put everything down on paper.

[ Related: 12 tips for creating a must-read business blog ]

2. Description and bios of your leadership/executive team

“The entrepreneur should clearly demonstrate what they are bringing to this venture – the idea, the technical ability or the passion,” says Hossein Rahnama, founder & CEO, Flybits . “Investors want to understand how you will execute using your personal strength.”

You should also “talk about the leadership team,” says Andrew Witkin, CEO, StickerYou . “If the leadership team has a previous track record of building and delivering businesses, this should be highlighted. Business plans serve multiple purposes, but one of them is to build trust, and the team is as important as the product to potential investors and partners.”

“Investors bet on jockeys, not horses, and knowing about who will execute on an idea is key to an investor making an investment decision,” says Richard J. Foster, president, Foster Management & Holdings. “Very frequently I’ll see multiple companies with the same idea, but the one to invest in is the one with the team who has the experience and the credentials to succeed. Having the best idea with the wrong team is a recipe for failure, but proving that your team is the [right] one to execute [your idea] can make all of the difference.”

3. Description of your product(s) or service(s)

“When developing a business plan, it’s crucial to clearly [explain] the need your product or service is trying to address,” says Elena Filimonova, senior vice president, global marketing and strategy, CGS . “Your business plan should highlight how the product or service will address the need, what is unique about your offering and why it would be difficult to replicate. To do this, you should outline key differentiators, features and why the product or service is something that stands out in the market.”

[ Related: 11 ways to build your online brand ]

4. Market/competitive analysis

“Every business plan should have a section that defines the target sales market – who you are selling to,” says Victor Clarke, owner, Clarke Inc. “This is the part that requires considerable research into areas such as industry sales data related to the service or product you are selling and trends within the industry. You should look at competitors and see who they are targeting, look at your current customer base and create a profile of an ideal customer or client for your product.”

“For a business plan to be effective and attractive to investors and partners, you must be able to provide tangible data and information that supports the notion that your demographic is strong and growing, and that market trends support the continued need for your service or product offering,” says Brock Murray, cofounder & COO, seoplus+ .

[ Related: 7 attributes of a successful CMO in the digital age ]

“Sequoia Capital has a great framework that every business plan should use: separate your Total Addressable Market (everyone who conceivably needs your product category), Serviceable Addressable Market (everyone who needs your specific product or service, limited by factors like where you can do business) and Serviceable Obtainable Market (the portion of the market you can realistically capture),” says Christopher S. Penn, vice president, Marketing Technology, SHIFT Communications . “For example, lots of companies say everyone is a customer, and while that may be a TAM, if the company has only one salesperson, their SOM is significantly smaller. VCs and investors especially want to understand what’s realistically obtainable, and splitting out your addressable markets… shows them you’re not just presenting pipe dreams.”

Also be sure to “include a competitive analysis section,” says Bryan Robertson, founder & chief revenue officer, Mindyra . “Every business has competition, so it’s a good idea to research companies in your industry who are fighting for the same customers. You should include specific details about their strengths and weaknesses. This forces you to become very familiar with your market. It also encourages you to think of ways to differentiate your business [from] the competition.”

5. Financials (how much cash you need and when you’ll pay it back)

“Make sure that the plan goes into exacting detail about how much startup capital will be needed, where it will come from and how it will be paid back,” says Bruce Stetar, executive director, Graduate Business Programs, SNHU .  “Equal importance should be given to how you [plan to] pay back capital as how you acquire it. Investors want to know when they will see a return.  Failing to plan adequately for capital acquisition and payback is one of the chief reasons that new businesses fail.” 

“Whether you’re hoping to receive funding to build a brick-and-mortar shop or a technology venture, you must have your numbers straight,” says Erica Swallow, founder & CEO, Southern Swallow . “For tech entrepreneurs, I’m a big fan of the  startup financial model template  developed by startup investor David Teten, in collaboration with a couple of colleagues. Based in a nearly fully-automated Excel worksheet, it enables early-stage entrepreneurs to map out their financial plan, without being too overwhelming. It’s the best startup financial model I’ve encountered over the past five years.”

6. Marketing plan

“It is critical to have a plan [for] how you are going to spend your marketing budget,” says Deborah Sweeney, CEO, MyCorporation . “Assess different options (paid search, salespeople, flyers, [social media], etc.) and the associated ROI with each.”

“The plan should cover both sales and advertising strategies and costs,” says Stetar, as well as customer acquisition costs. “Be conservative here since you will look good if your over achieve but it will cost you investor confidence if you under achieve.”

A successful business plan is one is easy to read and follow

You need to make your business plan easy to read and follow. “There’s nothing more daunting than to receive an all-text business plan, 30 pages in length,” says Swallow. “Keep your potential investors engaged by including product and user photos, team headshots, colorful headings, financial graphs, charts, tables, anything to make reading more of a pleasure. Even bullet points help.”

Indeed, “don’t underestimate the importance of visuals,” says Arvai. “Researchers have found that presentations using visual aids are, on average,  43 percent more persuasive  than those without.”

Finally, before you go public with your plan, “have trusted mentors and expert peers look over it [and give you] their feedback,” says Sam Lundin, CEO, Vimbly . “Having [someone] review your business plan [before you present it to investors] is crucial.”

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, how often should a business plan be updated, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

• A business plan is a document describing a company's business activities and how it plans to achieve its goals.
• Startup companies use business plans to get off the ground and attract outside investors.
• For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
• There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

• Executive summary: This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
• Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
• Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
• Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
• Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

A business plan is not a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections to begin with. Markets and the overall economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All of this calls for building some flexibility into your plan, so you can pivot to a new course if needed.

How frequently a business plan needs to be revised will depend on the nature of the business. A well-established business might want to review its plan once a year and make changes if necessary. A new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

U.S. Small Business Administration. " Write Your Business Plan ."

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11 Key Components of a Business Plan

3 min. read

Updated April 25, 2024

Somebody asked me what the key components of a good business plan were, and I’m glad they did—it’s one of my favorite topics.

It gives me a chance to review and revise another of the lists that I’ve done off and on for years (such as the one from yesterday on  common business plan mistakes ).

• 1. Measure a business plan by the decisions it causes

I’ve written about this one in several places. Like everything else in business, business plans have business objectives.

Does the plan accomplish its objective ? Whether it is better management, accountability, setting stepping stones to the future, convincing somebody to invest, or something else?

Realistically, it doesn’t matter whether your business plan is well-written, complete, well-formatted, creative, or intelligent. It only matters that it does the job it’s supposed to do. It’s a bad plan if it doesn’t.

• 2. Concrete specifics

Dates, deadlines, major milestones, task responsibilities, sales forecasts, spending budgets, and cash flow projections.

Ask yourself how executable it is. Ask yourself how you’ll know, on a regular basis, how much progress you’ve made and whether or not you’re on track.

• 3. Cash flow

Cash flow is the single most important concept in business. A business plan without cash flow is a marketing plan, strategic plan, summary, or something else—and those can be useful, but get your vocabulary right.

A business model, lean canvas, pitch deck, and so on can be useful in some contexts, like raising investment. But those aren’t business plans.

• 4. Realistic

While it is true that all business plans are wrong , assumptions, drivers, deadlines, milestones, and other such details should be realistic, not crazy.

The plan is to be executed. Impossible goals and crazy forecasts make the whole thing a waste of time.

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• 5. Short, sweet, easy-to-read summaries of strategy and tactics

Not all business plans need a lot of text.

The text and explanations are for outsiders, such as investors and bankers; however, many companies ought to use business planning to improve their business operations. If you don’t need the extra information, leave it out.

Define strategy and tactics in short bullet point lists. Tactics, by the way, are related to the marketing plan, product plan, financial plan, and so on. Strategy without tactics is just fluff.

• 6. Alignment of strategy and tactics

It’s surprising how often they don’t match.

Strategy is focus, key target markets , key product/service features, important differentiators, and so forth. Tactics are things like pricing, social media, channels, and financials, and the two should match.

A gourmet restaurant (strategy) should not have a drive-through option (tactics.)

• 7. Covers the event-specific, objective-specific bases

A lot of components of a business plan depend on the usage.

Internal plans have no need for descriptions of company teams. Market analysis hits one level for an internal plan but often has to be proof of market or validation for a plan associated with investment. Investment plans need to know something about exits; internal plans don’t.

• 8. Easy in, easy out

Don’t make anybody work to find what information is where in the plan. Keep it simple.

Use bullets as much as possible, and be careful with naked bullets for people who don’t really know the background. Don’t show off.

• 9. As lean as possible

Just big enough to do the job . It has to be reviewed and revised regularly to be useful. Nothing should be included that isn’t going to be used.

• 10. Geared for change

A good business plan is the opposite of written in stone. It’s going to change in a few weeks.

List assumptions because reviewing assumptions is the best way to determine when to change the plan and when to stick with it.

• 11. The right level of aggregation and summary

It’s not accounting. It’s planning.

Projections look like accounting statements, but they aren’t. They are summarized. They aren’t built on elaborate financial models. They are just detailed enough to generate good information.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Business plans might seem like an old-school stiff-collared practice, but they deserve a place in the startup realm, too. It’s probably not going to be the frame-worthy document you hang in the office—yet, it may one day be deserving of the privilege.

Whether you’re looking to win the heart of an angel investor or convince a bank to lend you money, you’ll need a business plan. And not just any ol’ notes and scribble on the back of a pizza box or napkin—you’ll need a professional, standardized report.

Bah. Sounds like homework, right?

Yes. Yes, it does.

However, just like bookkeeping, loan applications, and 404 redirects, business plans are an essential step in cementing your business foundation.

Don’t worry. We’ll show you how to write a business plan without boring you to tears. We’ve jam-packed this article with all the business plan examples, templates, and tips you need to take your non-existent proposal from concept to completion.

Table of Contents

What Is a Business Plan?

Tips to Make Your Small Business Plan Ironclad

How to Write a Business Plan in 6 Steps

Startup Business Plan Template

Business Plan Examples

Work on Making Your Business Plan

How to Write a Business Plan FAQs

What is a business plan why do you desperately need one.

A business plan is a roadmap that outlines:

• Who your business is, what it does, and who it serves
• Where your business is now
• Where you want it to go
• How you’re going to make it happen
• What might stop you from taking your business from Point A to Point B
• How you’ll overcome the predicted obstacles

While it’s not required when starting a business, having a business plan is helpful for a few reasons:

• Secure a Bank Loan: Before approving you for a business loan, banks will want to see that your business is legitimate and can repay the loan. They want to know how you’re going to use the loan and how you’ll make monthly payments on your debt. Lenders want to see a sound business strategy that doesn’t end in loan default.
• Win Over Investors: Like lenders, investors want to know they’re going to make a return on their investment. They need to see your business plan to have the confidence to hand you money.
• Stay Focused: It’s easy to get lost chasing the next big thing. Your business plan keeps you on track and focused on the big picture. Your business plan can prevent you from wasting time and resources on something that isn’t aligned with your business goals.

Beyond the reasoning, let’s look at what the data says:

• Simply writing a business plan can boost your average annual growth by 30%
• Entrepreneurs who create a formal business plan are 16% more likely to succeed than those who don’t
• A study looking at 65 fast-growth companies found that 71% had small business plans
• The process and output of creating a business plan have shown to improve business performance

Convinced yet? If those numbers and reasons don’t have you scrambling for pen and paper, who knows what will.

Don’t Skip: Business Startup Costs Checklist

Before we get into the nitty-gritty steps of how to write a business plan, let’s look at some high-level tips to get you started in the right direction:

Be Professional and Legit

You might be tempted to get cutesy or revolutionary with your business plan—resist the urge. While you should let your brand and creativity shine with everything you produce, business plans fall more into the realm of professional documents.

Think of your business plan the same way as your terms and conditions, employee contracts, or financial statements. You want your plan to be as uniform as possible so investors, lenders, partners, and prospective employees can find the information they need to make important decisions.

If you want to create a fun summary business plan for internal consumption, then, by all means, go right ahead. However, for the purpose of writing this external-facing document, keep it legit.

Know Your Audience

Your official business plan document is for lenders, investors, partners, and big-time prospective employees. Keep these names and faces in your mind as you draft your plan.

Think about what they might be interested in seeing, what questions they’ll ask, and what might convince (or scare) them. Cut the jargon and tailor your language so these individuals can understand.

Remember, these are busy people. They’re likely looking at hundreds of applicants and startup investments every month. Keep your business plan succinct and to the point. Include the most pertinent information and omit the sections that won’t impact their decision-making.

Invest Time Researching

You might not have answers to all the sections you should include in your business plan. Don’t skip over these!

Your audience will want:

• Detailed information about your customers
• Numbers and solid math to back up your financial claims and estimates
• Deep insights about your competitors and potential threats
• Data to support market opportunities and strategy

Your answers can’t be hypothetical or opinionated. You need research to back up your claims. If you don’t have that data yet, then invest time and money in collecting it. That information isn’t just critical for your business plan—it’s essential for owning, operating, and growing your company.

Stay Realistic

Your business may be ambitious, but reign in the enthusiasm just a teeny-tiny bit. The last thing you want to do is have an angel investor call BS and say “I’m out” before even giving you a chance.

The folks looking at your business and evaluating your plan have been around the block—they know a thing or two about fact and fiction. Your plan should be a blueprint for success. It should be the step-by-step roadmap for how you’re going from Point A to Point B.

How to Write a Business Plan—6 Essential Elements

Not every business plan looks the same, but most share a few common elements. Here’s what they typically include:

• Executive Summary
• Business Overview
• Products and Services
• Market Analysis
• Competitive Analysis
• Financial Strategy

Below, we’ll break down each of these sections in more detail.

1. Executive Summary

While your executive summary is the first page of your business plan, it’s the section you’ll write last. That’s because it summarizes your entire business plan into a succinct one-pager.

Begin with an executive summary that introduces the reader to your business and gives them an overview of what’s inside the business plan.

Your executive summary highlights key points of your plan. Consider this your elevator pitch. You want to put all your juiciest strengths and opportunities strategically in this section.

2. Business Overview

In this section, you can dive deeper into the elements of your business, including answering:

• What’s your business structure? Sole proprietorship, LLC, corporation, etc.
• Where is it located?
• Who owns the business? Does it have employees?
• What problem does it solve, and how?
• What’s your mission statement? Your mission statement briefly describes why you are in business. To write a proper mission statement, brainstorm your business’s core values and who you serve.

Don’t overlook your mission statement. This powerful sentence or paragraph could be the inspiration that drives an investor to take an interest in your business. Here are a few examples of powerful mission statements that just might give you the goosebumps:

• Patagonia: Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.
• Tesla: To accelerate the world’s transition to sustainable energy.
• InvisionApp : Question Assumptions. Think Deeply. Iterate as a Lifestyle. Details, Details. Design is Everywhere. Integrity.
• TED : Spread ideas.
• Warby Parker : To offer designer eyewear at a revolutionary price while leading the way for socially conscious businesses.

3. Products and Services

As the owner, you know your business and the industry inside and out. However, whoever’s reading your document might not. You’re going to need to break down your products and services in minute detail.

For example, if you own a SaaS business, you’re going to need to explain how this business model works and what you’re selling.

You’ll need to include:

• What services you sell: Describe the services you provide and how these will help your target audience.
• What products you sell: Describe your products (and types if applicable) and how they will solve a need for your target and provide value.
• How much you charge: If you’re selling services, will you charge hourly, per project, retainer, or a mixture of all of these? If you’re selling products, what are the price ranges?

4. Market Analysis

Your market analysis essentially explains how your products and services address customer concerns and pain points. This section will include research and data on the state and direction of your industry and target market.

This research should reveal lucrative opportunities and how your business is uniquely positioned to seize the advantage. You’ll also want to touch on your marketing strategy and how it will (or does) work for your audience.

Include a detailed analysis of your target customers. This describes the people you serve and sell your product to. Be careful not to go too broad here—you don’t want to fall into the common entrepreneurial trap of trying to sell to everyone and thereby not differentiating yourself enough to survive the competition.

The market analysis section will include your unique value proposition. Your unique value proposition (UVP) is the thing that makes you stand out from your competitors. This is your key to success.

If you don’t have a UVP, you don’t have a way to take on competitors who are already in this space. Here’s an example of an ecommerce internet business plan outlining their competitive edge:

FireStarters’ competitive advantage is offering product lines that make a statement but won’t leave you broke. The major brands are expensive and not distinctive enough to satisfy the changing taste of our target customers. FireStarters offers products that are just ahead of the curve and so affordable that our customers will return to the website often to check out what’s new.

5. Competitive Analysis

Your competitive analysis examines the strengths and weaknesses of competing businesses in your market or industry. This will include direct and indirect competitors. It can also include threats and opportunities, like economic concerns or legal restraints.

The best way to sum up this section is with a classic SWOT analysis. This will explain your company’s position in relation to your competitors.

6. Financial Strategy

Your financial strategy will sum up your revenue, expenses, profit (or loss), and financial plan for the future. It’ll explain how you make money, where your cash flow goes, and how you’ll become profitable or stay profitable.

This is one of the most important sections for lenders and investors. Have you ever watched Shark Tank? They always ask about the company’s financial situation. How has it performed in the past? What’s the ongoing outlook moving forward? How does the business plan to make it happen?

Answer all of these questions in your financial strategy so that your audience doesn’t have to ask. Go ahead and include forecasts and graphs in your plan, too:

• Balance sheet: This includes your assets, liabilities, and equity.
• Profit & Loss (P&L) statement: This details your income and expenses over a given period.
• Cash flow statement: Similar to the P&L, this one will show all cash flowing into and out of the business each month.

It takes cash to change the world—lenders and investors get it. If you’re short on funding, explain how much money you’ll need and how you’ll use the capital. Where are you looking for financing? Are you looking to take out a business loan, or would you rather trade equity for capital instead?

Read More: 16 Financial Concepts Every Entrepreneur Needs to Know

Startup Business Plan Template (Copy/Paste Outline)

Ready to write your own business plan? Copy/paste the startup business plan template below and fill in the blanks.

Executive Summary Remember, do this last. Summarize who you are and your business plan in one page.

Business Overview Describe your business. What’s it do? Who owns it? How’s it structured? What’s the mission statement?

Products and Services Detail the products and services you offer. How do they work? What do you charge?

Market Analysis Write about the state of the market and opportunities. Use date. Describe your customers. Include your UVP.

Competitive Analysis Outline the competitors in your market and industry. Include threats and opportunities. Add a SWOT analysis of your business.

Financial Strategy Sum up your revenue, expenses, profit (or loss), and financial plan for the future. If you’re applying for a loan, include how you’ll use the funding to progress the business.

5 Frame-Worthy Business Plan Examples

Want to explore other templates and examples? We got you covered. Check out these 5 business plan examples you can use as inspiration when writing your plan:

• SBA Wooden Grain Toy Company
• SBA We Can Do It Consulting
• OrcaSmart Business Plan Sample
• Plum Business Plan Template
• PandaDoc Free Business Plan Templates

Get to Work on Making Your Business Plan

If you find you’re getting stuck on perfecting your document, opt for a simple one-page business plan —and then get to work. You can always polish up your official plan later as you learn more about your business and the industry.

Remember, business plans are not a requirement for starting a business—they’re only truly essential if a bank or investor is asking for it.

Ask others to review your business plan. Get feedback from other startups and successful business owners. They’ll likely be able to see holes in your planning or undetected opportunities—just make sure these individuals aren’t your competitors (or potential competitors).

Your business plan isn’t a one-and-done report—it’s a living, breathing document. You’ll make changes to it as you grow and evolve. When the market or your customers change, your plan will need to change to adapt.

That means when you’re finished with this exercise, it’s not time to print your plan out and stuff it in a file cabinet somewhere. No, it should sit on your desk as a day-to-day reference. Use it (and update it) as you make decisions about your product, customers, and financial plan.

Review your business plan frequently, update it routinely, and follow the path you’ve developed to the future you’re building.

Keep Learning: New Product Development Process in 8 Easy Steps

What financial information should be included in a business plan?

Be as detailed as you can without assuming too much. For example, include your expected revenue, expenses, profit, and growth for the future.

What are some common mistakes to avoid when writing a business plan?

The most common mistake is turning your business plan into a textbook. A business plan is an internal guide and an external pitching tool. Cut the fat and only include the most relevant information to start and run your business.

Who should review my business plan before I submit it?

Co-founders, investors, or a board of advisors. Otherwise, reach out to a trusted mentor, your local chamber of commerce, or someone you know that runs a business.

Ready to Write Your Business Plan?

Don’t let creating a business plan hold you back from starting your business. Writing documents might not be your thing—that doesn’t mean your business is a bad idea.

Let us help you get started.

Join our free training to learn how to start an online side hustle in 30 days or less. We’ll provide you with a proven roadmap for how to find, validate, and pursue a profitable business idea (even if you have zero entrepreneurial experience).

Stuck on the ideas part? No problem. When you attend the masterclass, we’ll send you a free ebook with 100 of the hottest side hustle trends right now. It’s chock full of brilliant business ideas to get you up and running in the right direction.

About Jesse Sumrak

Jesse Sumrak is a writing zealot focused on creating killer content. He’s spent almost a decade writing about startup, marketing, and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped business. A writer by day and a peak bagger by night (and early early morning), you can usually find Jesse preparing for the apocalypse on a precipitous peak somewhere in the Rocky Mountains of Colorado.

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10 Essential Components of a Business Plan and How to Write Them

Business Plan Template

Ayush Jalan

• January 4, 2024

12 Min Read

A business plan is an essential document for any business, whether it’s a startup or an established enterprise. It’s the first thing any interested investor will ask for if they like your business idea and want to partner with you. 

That’s why it’s important to pay attention when writing your business plan and the components inside it. An incomplete business plan can give the impression that you’re unqualified—discouraging investors and lenders. 

A good business plan reduces ambiguity and communicates all essential details such as your financials, market analysis, competitive analysis, and a timeline for implementation of the plan. In this article, we’ll discuss the 10 important business plan components. 

10 Important Business Plan Components

A comprehensive and well-thought-out business plan acts as a roadmap that guides you in making sound decisions and taking the right actions at the right times. Here are its key components and what to include in them.

1. Executive summary

The executive summary is one of the most important parts of a business plan. It’s the first thing potential investors will read and should therefore provide a clear overview of your business and its goals.

In other words, it helps the reader get a better idea of what to expect from your company. So, when writing an executive summary of your business, don’t forget to mention your mission and vision statement.

Mission statement

A mission statement is a brief statement that outlines your objectives and what you want to achieve. It acts as a guiding principle that informs decisions and provides a clear direction for the organization to follow.

For instance, Google’s mission is to “organize the world’s information and make it universally accessible and useful.” It’s short, inspiring, and immediately communicates what the company does.

A mission statement should be realistic, and hint towards a goal that is achievable in a reasonable amount of time with the resources you currently have or are going to acquire in the near future.

Vision statement

While a mission statement is more actionable and has an immediate effect on the daily activities of the company, a vision statement is more aspirational and has a much broader scope.

In other words, it highlights where the company aims to go in the future and the positive change it hopes to make in the world within its lifetime.

2. Company description

The second component of your business plan is the company description. Here, you provide a brief overview of your company, its products or services, and its history. You can also add any notable achievements if they are significant enough for an investor to know.

A company overview offers a quick bird’s-eye view of things such as your business model , operational capabilities, financials, business philosophy, size of the team, code of conduct, and short-term and long-term objectives.

Products and services

The products and services part of your company description explains what your business offers to its customers, how it’s delivered, and the costs involved in acquiring new customers and executing a sale.

Company History

Company history is the timeline of events that took place in your business from its origin to the present day. It includes a brief profile of the founder(s) and their background, the date the company was founded, any notable achievements and milestones, and other similar facts and details.

If you’re a startup, you’ll probably not have much of a history to write about. In that case, you can share stories of the challenges your startup faced during its inception and how your team overcame them.

3. Market analysis

The market analysis section of your business plan provides an in-depth analysis of the industry, target market, and competition. It should underline the risks and opportunities associated with your industry, and also comment on the attributes of your target customer.

Demographics and segmentation

Understanding the demographics of your customers plays a big role in how well you’re able to identify their traits and serve them.

By dividing your target audience into smaller and more manageable groups, you can tailor your services and products to better meet their needs.

You can use demographics such as age, gender, income, location, ethnicity, and education level to better understand the preferences and behaviors of each segment, and use that data to create more effective marketing strategies.     

Target market and size

Understanding your target market lies at the core of all your marketing endeavors. After all, if you don’t have a clear idea of who you’re serving, you won’t be able to serve well no matter how big your budget is.

For instance, Starbucks’ primary target market includes working professionals and office workers. The company has positioned itself such that many of its customers start their day with its coffee.

Estimating the market size helps you know how much scope there is to scale your business in the future. In other words, you’re trying to determine how much potential revenue exists in this market and if it’s worth the investment.

Market need

The next step is to figure out the market need, i.e., the prevalent pain points that people in that market experience. The easiest way to find these pain points is to read the negative reviews people leave on Amazon for products that are similar to yours.

The better your product solves those pain points, the better your chances of capturing that market. In addition, since your product is solving a problem that your rivals can’t, you can also charge a premium price.

To better identify the needs of your target customers, it helps to take into account things such as local cultural values, industry trends, buying habits, tastes and preferences, price elasticity, and more.

4. Product Summary

The product summary section of your business plan goes into detail about the features and benefits that your products and services offer, and how they differ from your competitors. It also outlines the manufacturing process, pricing, cost of production, inventory, packaging, and capital requirements.

5. Competitive analysis

Unless you’ve discovered an untapped market, you’re probably going to face serious competition and it’s only going to increase as you scale your business later down the line.

This is where the competitive analysis section helps; it gives an overview of the competitive landscape, introduces your immediate rivals, and highlights the current dominant companies and their market share.

In such an environment, it helps to have certain competitive advantages against your rivals so you can stand out in the market. Simply put, a competitive advantage is the additional value you can provide to your customers that your rivals can’t—perhaps via unique product features, excellent customer service, or more.

Want to Perform Competitive Analysis for Your Business?

Discover your competition’s secrets effortlessly with our user-friendly and Free Competitor Analysis Generator!

6. Marketing and sales plan

The marketing and sales plan is one of the most important business plan components. It explains how you plan to penetrate the market, position your brand in the minds of the buyers, build brand loyalty, increase sales, and remain competitive in an ever-changing business environment.

Unique selling proposition

A unique selling proposition (USP) conveys how your products and services differ from those of your competitors, and the added value those differences provide.

A strong USP will stand out in a competitive market and make potential customers more likely to switch to your brand—essentially capturing the market share of your rivals.

Marketing Plan

Your product might be unique, but if people don’t even know that it exists, it won’t sell. That’s where marketing comes in.

A marketing plan outlines strategies for reaching your target market and achieving sales goals. It also outlines the budget required for advertising and promotion.

You may also include data on the target market, target demographics, objectives, strategies, a timeline, budget, and the metrics considered for evaluating success.

Sales and distribution plan

Once people are made aware of your product, the next step is to ensure it reaches them. This means having a competent sales and distribution plan and a strong supply chain.

Lay out strategies for reaching potential customers, such as online marketing, lead generation, retail distribution channels, or direct sales.

Your goal here is to minimize sales costs and address the risks involved with the distribution of your product. If you’re selling ice cream, for example, you would have to account for the costs of refrigeration and cold storage.

Pricing strategy

Pricing is a very sensitive yet important part of any business. When creating a pricing strategy , you need to consider factors such as market demand, cost of production, competitor prices, disposable income of target customers, and profitability goals.

Some businesses have a small profit margin but sell large volumes of their product, while others sell fewer units but with a massive markup. You will have to decide for yourself which approach you want to follow.

Before setting your marketing plans into action, you need a budget for them. This means writing down how much money you’ll need, how it will be used, and the potential return you are estimating on this investment.

A budget should be flexible, meaning that it should be open to changes as the market shifts and customer behavior evolves. The goal here is to make sure that the company is making the best use of its resources by minimizing the wastage of funds.

7. Operations plan

The operations plan section of your business plan provides an overview of how the business is run and its day-to-day operations. This section is especially important for manufacturing businesses.

It includes a description of your business structure, the roles and responsibilities of each team member, the resources needed, and the procedures you will use to ensure the smooth functioning of your business. The goal here is to maximize output whilst minimizing the wastage of raw material or human labor.

8. Management team

At the core of any successful business lies a dedicated, qualified, and experienced management team overlooking key business activities. 

This section provides an overview of the key members of your management team including their credentials, professional background, role and responsibilities, experience, and qualifications.

A lot of investors give special attention to this section as it helps them ascertain the competence and work ethic of the members involved.

Organizational structure

An organizational structure defines the roles, responsibilities, decision-making processes, and authority of each individual or department in an organization.

Having a clear organizational structure improves communication, increases efficiency, promotes collaboration, and makes it easier to delegate tasks. Startups usually have a flatter organizational hierarchy whereas established businesses have a more traditional structure of power and authority.

9. Financial Plan

Financials are usually the least fun thing to talk about, but they are important nonetheless as they provide an overview of your current financial position, capital requirements, projections, and plans for repayment of any loans. 

Your financial plan should also include an analysis of your startup costs, operating costs, administration costs, and sources of revenue.

Funding requirements

Once an investor has read through your business plan, it’s time to request funding. Investors will want to see an accurate and detailed breakdown of the funds required and an explanation of why the requested funds are necessary for the operation and expansion of your business.

10. Appendix

The appendix is the last section of your business plan and it includes additional supporting documents such as resumes of key team members, market research documents, financial statements, and legal documents. 

In other words, anything important or relevant that couldn’t fit in any of the former sections of your business plan goes in the appendix.

Write a Business Plan Worth Reading

Starting a business is never easy, but it’s a little less overwhelming if you have a well-made business plan. It helps you better navigate the industry, reduce risk, stay competitive, and make the best use of your time and money.

Remember, since every business is unique, every business plan is unique too, and must be regularly updated to keep up with changing industry trends. Also, it’s very likely that interested investors will give you feedback, so make sure to implement their recommendations as well.

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About the Author

Ayush is a writer with an academic background in business and marketing. Being a tech-enthusiast, he likes to keep a sharp eye on the latest tech gadgets and innovations. When he's not working, you can find him writing poetry, gaming, playing the ukulele, catching up with friends, and indulging in creative philosophies.

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Elements of a Business Plan There are seven major sections of a business plan, and each one is a complex document. Read this selection from our business plan tutorial to fully understand these components.

Now that you understand why you need a business plan and you've spent some time doing your homework gathering the information you need to create one, it's time to roll up your sleeves and get everything down on paper. The following pages will describe in detail the seven essential sections of a business plan: what you should include, what you shouldn't include, how to work the numbers and additional resources you can turn to for help. With that in mind, jump right in.

Executive Summary

Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight. Clearly state what you're asking for in the summary.

The statement should be kept short and businesslike, probably no more than half a page. It could be longer, depending on how complicated the use of funds may be, but the summary of a business plan, like the summary of a loan application, is generally no longer than one page. Within that space, you'll need to provide a synopsis of your entire business plan. Key elements that should be included are:

• Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and why the business will hold a competitive advantage.
• Financial features. Highlights the important financial points of the business including sales, profits, cash flows and return on investment.
• Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If the loan for initial capital will be based on security instead of equity, you should also specify the source of collateral.
• Current business position. Furnishes relevant information about the company, its legal form of operation, when it was formed, the principal owners and key personnel.
• Major achievements. Details any developments within the company that are essential to the success of the business. Major achievements include items like patents, prototypes, location of a facility, any crucial contracts that need to be in place for product development, or results from any test marketing that has been conducted.

When writing your statement of purpose, don't waste words. If the statement of purpose is eight pages, nobody's going to read it because it'll be very clear that the business, no matter what its merits, won't be a good investment because the principals are indecisive and don't really know what they want. Make it easy for the reader to realize at first glance both your needs and capabilities.

Business Description

Tell them all about it.

The business description usually begins with a short description of the industry. When describing the industry, discuss the present outlook as well as future possibilities. You should also provide information on all the various markets within the industry, including any new products or developments that will benefit or adversely affect your business. Base all of your observations on reliable data and be sure to footnote sources of information as appropriate. This is important if you're seeking funding; the investor will want to know just how dependable your information is, and won't risk money on assumptions or conjecture.

When describing your business, the first thing you need to concentrate on is its structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented. Also state whether the business is new or already established.

In addition to structure, legal form should be reiterated once again. Detail whether the business is a sole proprietorship, partnership or corporation, who its principals are, and what they will bring to the business.

You should also mention who you will sell to, how the product will be distributed, and the business's support systems. Support may come in the form of advertising, promotions and customer service.

Once you've described the business, you need to describe the products or services you intend to market. The product description statement should be complete enough to give the reader a clear idea of your intentions. You may want to emphasize any unique features or variations from concepts that can typically be found in the industry.

Be specific in showing how you will give your business a competitive edge. For example, your business will be better because you will supply a full line of products; competitor A doesn't have a full line. You're going to provide service after the sale; competitor B doesn't support anything he sells. Your merchandise will be of higher quality. You'll give a money-back guarantee. Competitor C has the reputation for selling the best French fries in town; you're going to sell the best Thousand Island dressing.

How Will I Profit?

Now you must be a classic capitalist and ask yourself, "How can I turn a buck? And why do I think I can make a profit that way?" Answer that question for yourself, and then convey that answer to others in the business concept section. You don't have to write 25 pages on why your business will be profitable. Just explain the factors you think will make it successful, like the following: it's a well-organized business, it will have state-of-the-art equipment, its location is exceptional, the market is ready for it, and it's a dynamite product at a fair price.

If you're using your business plan as a document for financial purposes, explain why the added equity or debt money is going to make your business more profitable.

Show how you will expand your business or be able to create something by using that money.

Show why your business is going to be profitable. A potential lender is going to want to know how successful you're going to be in this particular business. Factors that support your claims for success can be mentioned briefly; they will be detailed later. Give the reader an idea of the experience of the other key people in the business. They'll want to know what suppliers or experts you've spoken to about your business and their response to your idea. They may even ask you to clarify your choice of location or reasons for selling this particular product.

The business description can be a few paragraphs in length to a few pages, depending on the complexity of your plan. If your plan isn't too complicated, keep your business description short, describing the industry in one paragraph, the product in another, and the business and its success factors in three or four paragraphs that will end the statement.

While you may need to have a lengthy business description in some cases, it's our opinion that a short statement conveys the required information in a much more effective manner. It doesn't attempt to hold the reader's attention for an extended period of time, and this is important if you're presenting to a potential investor who will have other plans he or she will need to read as well. If the business description is long and drawn-out, you'll lose the reader's attention, and possibly any chance of receiving the necessary funding for the project.

Market Strategies

Define your market.

Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this will allow you to develop your own estimates for the future of your business.

Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential.

The total aggregate sales of your competitors will provide you with a fairly accurate estimate of the total potential market. Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market--the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes or product-oriented.

For instance, if the distribution of your product is confined to a specific geographic area, then you want to further define the target market to reflect the number of users or sales of that product within that geographic segment.

Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market. In the case of a microbrewery that plans to brew a premium lager beer, the total feasible market could be defined by determining how many drinkers of premium pilsner beers there are in the target market.

It's important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.

Projecting Market Share

Arriving at a projection of the market share for a business plan is very much a subjective estimate. It's based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. For instance, even though there may be a sizable number of premium pilsner drinkers to form the total feasible market, you need to be able to reach them through your distribution network at a price point that's competitive, and then you have to let them know it's available and where they can buy it. How effectively you can achieve your distribution, pricing and promotional goals determines the extent to which you will be able to garner market share.

For a business plan, you must be able to estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, you'll need to consider two factors:

• Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
• Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where you have five distinct stages: early pioneer users, early users, early majority users, late majority users and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.

Defining the market is but one step in your analysis. With the information you've gained through market research, you need to develop strategies that will allow you to fulfill your objectives.

Positioning Your Business

When discussing market strategy, it's inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of target customers within as well as the actions of primary competitors.

Before a product can be positioned, you need to answer several strategic questions such as:

• How are your competitors positioning themselves?
• What specific attributes does your product have that your competitors' don't?
• What customer needs does your product fulfill?

Once you've answered your strategic questions based on research of the market, you can then begin to develop your positioning strategy and illustrate that in your business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It should merely point out exactly how you want your product perceived by both customers and the competition.

How you price your product is important because it will have a direct effect on the success of your business. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:

• All prices must cover costs.
• The best and most effective way of lowering your sales prices is to lower costs.
• Your prices must reflect the dynamics of cost, demand, changes in the market and response to your competition.
• Prices must be established to assure sales. Don't price against a competitive operation alone. Rather, price to sell.
• Product utility, longevity, maintenance and end use must be judged continually, and target prices adjusted accordingly.
• Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available to you:

• Cost-plus pricing. Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
• Demand pricing. Used by companies that sell their product through a variety of sources at differing prices based on demand.
• Competitive pricing. Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.
• Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product. Each method listed above has its strengths and weaknesses.
• Distribution

Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. A good way to make your decision is to analyze your competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide you with a strategic advantage.

Some of the more common distribution channels include:

• Direct sales. The most effective distribution channel is to sell directly to the end-user.
• OEM (original equipment manufacturer) sales. When your product is sold to the OEM, it is incorporated into their finished product and it is distributed to the end user.
• Manufacturer's representatives. One of the best ways to distribute a product, manufacturer's reps, as they are known, are salespeople who operate out of agencies that handle an assortment of complementary products and divide their selling time among them.
• Wholesale distributors. Using this channel, a manufacturer sells to a wholesaler, who in turn sells it to a retailer or other agent for further distribution through the channel until it reaches the end user.
• Brokers. Third-party distributors who often buy directly from the distributor or wholesaler and sell to retailers or end users.
• Retail distributors. Distributing a product through this channel is important if the end user of your product is the general consuming public.
• Direct Mail. Selling to the end user using a direct mail campaign.

As we've mentioned already, the distribution strategy you choose for your product will be based on several factors that include the channels being used by your competition, your pricing strategy and your own internal resources.

Promotion Plan

With a distribution strategy formed, you must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell your product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort. This includes:

• Advertising. Includes the advertising budget, creative message(s), and at least the first quarter's media schedule.
• Packaging. Provides a description of the packaging strategy. If available, mockups of any labels, trademarks or service marks should be included.
• Public relations. A complete account of the publicity strategy including a list of media that will be approached as well as a schedule of planned events.
• Sales promotions. Establishes the strategies used to support the sales message. This includes a description of collateral marketing material as well as a schedule of planned promotional activities such as special sales, coupons, contests and premium awards.
• Personal sales. An outline of the sales strategy including pricing procedures, returns and adjustment rules, sales presentation methods, lead generation, customer service policies, salesperson compensation, and salesperson market responsibilities.

Sales Potential

Once the market has been researched and analyzed, conclusions need to be developed that will supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Most business plans will project revenue for up to three years, although five-year projections are becoming increasingly popular among lenders.

When developing the revenue model for the business plan, the equation used to project sales is fairly simple. It consists of the total number of customers and the average revenue from each customer. In the equation, "T" represents the total number of people, "A" represents the average revenue per customer, and "S" represents the sales projection. The equation for projecting sales is: (T)(A) = S

Using this equation, the annual sales for each year projected within the business plan can be developed. Of course, there are other factors that you'll need to evaluate from the revenue model. Since the revenue model is a table illustrating the source for all income, every segment of the target market that is treated differently must be accounted for. In order to determine any differences, the various strategies utilized in order to sell the product have to be considered. As we've already mentioned, those strategies include distribution, pricing and promotion.

Competitive Analysis

Identify and analyze your competition.

The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.

The first step in a competitor analysis is to identify the current and potential competition. There are essentially two ways you can identify competitors. The first is to look at the market from the customer's viewpoint and group all your competitors by the degree to which they contend for the buyer's dollar. The second method is to group competitors according to their various competitive strategies so you understand what motivates them.

Once you've grouped your competitors, you can start to analyze their strategies and identify the areas where they're most vulnerable. This can be done through an examination of your competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually based on the presence and absence of key assets and skills needed to compete in the market.

To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies , suggests concentrating your efforts in four areas:

• The reasons behind successful as well as unsuccessful firms
• Prime customer motivators
• Major component costs
• Industry mobility barriers

According to theory, the performance of a company within a market is directly related to the possession of key assets and skills. Therefore, an analysis of strong performers should reveal the causes behind such a successful track record. This analysis, in conjunction with an examination of unsuccessful companies and the reasons behind their failure, should provide a good idea of just what key assets and skills are needed to be successful within a given industry and market segment.

Through your competitor analysis, you will also have to create a marketing strategy that will generate an asset or skill competitors don't have, which will provide you with a distinct and enduring competitive advantage. Since competitive advantages are developed from key assets and skills, you should sit down and put together a competitive strength grid. This is a scale that lists all your major competitors or strategic groups based upon their applicable assets and skills and how your own company fits on this scale.

Create a Competitive Strength Grid

To put together a competitive strength grid, list all the key assets and skills down the left margin of a piece of paper. Along the top, write down two column headers: "weakness" and "strength." In each asset or skill category, place all the competitors that have weaknesses in that particular category under the weakness column, and all those that have strengths in that specific category in the strength column. After you've finished, you'll be able to determine just where you stand in relation to the other firms competing in your industry.

Once you've established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate them in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas:

• Advertising

Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we've already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but also why your strategy will work.

Design and Development Plan

What you'll cover in this section.

The purpose of the design and development plan section is to provide investors with a description of the product's design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.

There are generally three areas you'll cover in the development plan section:

• Product development
• Market development
• Organizational development

Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.

The first step in the development process is setting goals for the overall development plan. From your analysis of the market and competition, most of the product, market and organizational development goals will be readily apparent. Each goal you define should have certain characteristics. Your goals should be quantifiable in order to set up time lines, directed so they relate to the success of the business, consequential so they have impact upon the company, and feasible so that they aren't beyond the bounds of actual completion.

Goals For Product Development

Goals for product development should center on the technical as well as the marketing aspects of the product so that you have a focused outline from which the development team can work. For example, a goal for product development of a microbrewed beer might be "Produce recipe for premium lager beer" or "Create packaging for premium lager beer." In terms of market development, a goal might be, "Develop collateral marketing material." Organizational goals would center on the acquisition of expertise in order to attain your product and market-development goals. This expertise usually needs to be present in areas of key assets that provide a competitive advantage. Without the necessary expertise, the chances of bringing a product successfully to market diminish.

With your goals set and expertise in place, you need to form a set of procedural tasks or work assignments for each area of the development plan. Procedures will have to be developed for product development, market development, and organization development. In some cases, product and organization can be combined if the list of procedures is short enough.

Procedures should include how resources will be allocated, who is in charge of accomplishing each goal, and how everything will interact. For example, to produce a recipe for a premium lager beer, you would need to do the following:

• Gather ingredients.
• Determine optimum malting process.
• Gauge mashing temperature.
• Boil wort and evaluate which hops provide the best flavor.
• Determine yeast amounts and fermentation period.
• Determine aging period.
• Carbonate the beer.
• Decide whether or not to pasteurize the beer.

The development of procedures provides a list of work assignments that need to be accomplished, but one thing it doesn't provide are the stages of development that coordinate the work assignments within the overall development plan. To do this, you first need to amend the work assignments created in the procedures section so that all the individual work elements are accounted for in the development plan. The next stage involves setting deliverable dates for components as well as the finished product for testing purposes. There are primarily three steps you need to go through before the product is ready for final delivery:

• Preliminary product review . All the product's features and specifications are checked.
• Critical product review . All the key elements of the product are checked and gauged against the development schedule to make sure everything is going according to plan.
• Final product review . All elements of the product are checked against goals to assure the integrity of the prototype.

Scheduling and Costs

This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass. When producing the schedule, provide a column for each procedural task, how long it takes, start date and stop date. If you want to provide a number for each task, include a column in the schedule for the task number.

Development Budget

That leads us into a discussion of the development budget. When forming your development budget, you need to take into account all the expenses required to design the product and to take it from prototype to production.

Costs that should be included in the development budget include:

• Material . All raw materials used in the development of the product.
• Direct labor . All labor costs associated with the development of the product.
• Overhead . All overhead expenses required to operate the business during the development phase such as taxes, rent, phone, utilities, office supplies, etc.
• G&A costs . The salaries of executive and administrative personnel along with any other office support functions.
• Marketing & sales . The salaries of marketing personnel required to develop pre-promotional materials and plan the marketing campaign that should begin prior to delivery of the product.
• Professional services . Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
• Miscellaneous Costs . Costs that are related to product development.
• Capital equipment . To determine the capital requirements for the development budget, you first have to establish what type of equipment you will need, whether you will acquire the equipment or use outside contractors, and finally, if you decide to acquire the equipment, whether you will lease or purchase it.

As we mentioned already, the company has to have the proper expertise in key areas to succeed; however, not every company will start a business with the expertise required in every key area. Therefore, the proper personnel have to be recruited, integrated into the development process, and managed so that everyone forms a team focused on the achievement of the development goals.

Before you begin recruiting, however, you should determine which areas within the development process will require the addition of personnel. This can be done by reviewing the goals of your development plan to establish key areas that need attention. After you have an idea of the positions that need to be filled, you should produce a job description and job specification.

Once you've hired the proper personnel, you need to integrate them into the development process by assigning tasks from the work assignments you've developed. Finally, the whole team needs to know what their role is within the company and how each interrelates with every position within the development team. In order to do this, you should develop an organizational chart for your development team.

Assessing Risks

Finally, the risks involved in developing the product should be assessed and a plan developed to address each one. The risks during the development stage will usually center on technical development of the product, marketing, personnel requirements, and financial problems. By identifying and addressing each of the perceived risks during the development period, you will allay some of your major fears concerning the project and those of investors as well.

Operations & Management

The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you'll develop the next set of financial tables that will supply the foundation for the "Financial Components" section.

The financial tables that you'll develop within the operations plan include:

• The operating expense table
• The capital requirements table
• The cost of goods table

There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.

Organizational Structure

The organizational structure of the company is an essential element within a business plan because it provides a basis from which to project operating expenses. This is critical to the formation of financial statements, which are heavily scrutinized by investors; therefore, the organizational structure has to be well-defined and based within a realistic framework given the parameters of the business.

Although every company will differ in its organizational structure, most can be divided into several broad areas that include:

• Marketing and sales (includes customer relations and service)
• Production (including quality assurance)
• Research and development
• Administration

These are very broad classifications and it's important to keep in mind that not every business can be divided in this manner. In fact, every business is different, and each one must be structured according to its own requirements and goals.

The four stages for organizing a business are:

Calculate Your Personnel Numbers

Once you've structured your business, however, you need to consider your overall goals and the number of personnel required to reach those goals. In order to determine the number of employees you'll need to meet the goals you've set for your business, you'll need to apply the following equation to each department listed in your organizational structure: C / S = P

In this equation, C represents the total number of customers, S represents the total number of customers that can be served by each employee, and P represents the personnel requirements. For instance, if the number of customers for first year sales is projected at 10,110 and one marketing employee is required for every 200 customers, you would need 51 employees within the marketing department: 10,110 / 200 = 51

Once you calculate the number of employees that you'll need for your organization, you'll need to determine the labor expense. The factors that need to be considered when calculating labor expense (LE) are the personnel requirements (P) for each department multiplied by the employee salary level (SL). Therefore, the equation would be: P * SL = LE

Using the marketing example from above, the labor expense for that department would be: 51 * $40,000 = $2,040,000

Calculate Overhead Expenses

Once the organization's operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).

Overhead expenses usually include the following:

• Maintenance and repair
• Equipment leases
• Advertising & promotion
• Packaging & shipping
• Payroll taxes and benefits
• Uncollectible receivables
• Professional services
• Loan payments
• Depreciation

In order to develop the overhead expenses for the expense table used in this portion of the business plan, you need to multiply the number of employees by the expenses associated with each employee. Therefore, if NE represents the number of employees and EE is the expense per employee, the following equation can be used to calculate the sum of each overhead (OH) expense: OH = NE * EE

Develop a Capital Requirements Table

In addition to the expense table, you'll also need to develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you'll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.

In order to generate the capital requirements table, you first have to establish the various elements within the business that will require capital investment. For service businesses, capital is usually tied to the various pieces of equipment used to service customers.

Capital for manufacturing companies, on the other hand, is based on the equipment required in order to produce the product. Manufacturing equipment usually falls into three categories: testing equipment, assembly equipment and packaging equipment.

With these capital elements in mind, you need to determine the number of units or customers, in terms of sales, that each equipment item can adequately handle. This is important because capital requirements are a product of income, which is produced through unit sales. In order to meet sales projections, a business usually has to invest money to increase production or supply better service. In the business plan, capital requirements are tied to projected sales as illustrated in the revenue model shown earlier in this chapter.

For instance, if the capital equipment required is capable of handling the needs of 10,000 customers at an average sale of $10 each, that would be $100,000 in sales, at which point additional capital will be required in order to purchase more equipment should the company grow beyond this point. This leads us to another factor within the capital requirements equation, and that is equipment cost.

If you multiply the cost of equipment by the number of customers it can support in terms of sales, it would result in the capital requirements for that particular equipment element. Therefore, you can use an equation in which capital requirements (CR) equals sales (S) divided by number of customers (NC) supported by each equipment element, multiplied by the average sale (AS), which is then multiplied by the capital cost (CC) of the equipment element. Given these parameters, your equation would look like the following: CR = [(S / NC) * AS] * CC

The capital requirements table is formed by adding all your equipment elements to generate the total new capital for that year. During the first year, total new capital is also the total capital required. For each successive year thereafter, total capital (TC) required is the sum of total new capital (NC) plus total capital (PC) from the previous year, less depreciation (D), once again, from the previous year. Therefore, your equation to arrive at total capital for each year portrayed in the capital requirements model would be: TC = NC + PC - D

Keep in mind that depreciation is an expense that shows the decrease in value of the equipment throughout its effective lifetime. For many businesses, depreciation is based upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the schedule that best fits your business. Depreciation is also the basis for a tax deduction as well as the flow of money for new capital. You may need to seek consultation from an expert in this area.

Create a Cost of Goods Table

The last table that needs to be generated in the operations and management section of your business plan is the cost of goods table. This table is used only for businesses where the product is placed into inventory. For a retail or wholesale business, cost of goods sold --or cost of sales --refers to the purchase of products for resale, i.e. the inventory. The products that are sold are logged into cost of goods as an expense of the sale, while those that aren't sold remain in inventory.

For a manufacturing firm, cost of goods is the cost incurred by the company to manufacture its product. This usually consists of three elements:

As in retail, the merchandise that is sold is expensed as a cost of goods , while merchandise that isn't sold is placed in inventory. Cost of goods has to be accounted for in the operations of a business. It is an important yardstick for measuring the firm's profitability for the cash-flow statement and income statement.

In the income statement, the last stage of the manufacturing process is the item expensed as cost of goods, but it is important to document the inventory still in various stages of the manufacturing process because it represents assets to the company. This is important to determining cash flow and to generating the balance sheet.

That is what the cost of goods table does. It's one of the most complicated tables you'll have to develop for your business plan, but it's an integral part of portraying the flow of inventory through your operations, the placement of assets within the company, and the rate at which your inventory turns.

In order to generate the cost of goods table, you need a little more information in addition to what your labor and material cost is per unit. You also need to know the total number of units sold for the year, the percentage of units which will be fully assembled, the percentage which will be partially assembled, and the percentage which will be in unassembled inventory. Much of these figures will depend on the capacity of your equipment as well as on the inventory control system you develop. Along with these factors, you also need to know at what stage the majority of the labor is performed.

Financial Components

Financial statements to include.

Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the business concept and the management team. Astute investors look carefully at the charts, tables, formulas and spreadsheets in the financial section, because they know that this information is like the pulse, respiration rate and blood pressure in a human--it shows whether the patient is alive and what the odds are for continued survival.

Financial statements, like bad news, come in threes. The news in financial statements isn't always bad, of course, but taken together it provides an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward.

The three common statements are a cash flow statement, an income statement and a balance sheet. Most entrepreneurs should provide them and leave it at that. But not all do. But this is a case of the more, the less merry. As a rule, stick with the big three: income, balance sheet and cash flow statements.

These three statements are interlinked, with changes in one necessarily altering the others, but they measure quite different aspects of a company's financial health. It's hard to say that one of these is more important than another. But of the three, the income statement may be the best place to start.

Income Statement

The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It's a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result--which is either a profit or a loss.

For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It's formed by listing your financial projections in the following manner:

• Income . Includes all the income generated by the business and its sources.
• Cost of goods . Includes all the costs related to the sale of products in inventory.
• Gross profit margin . The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
• Operating expenses . Includes all overhead and labor expenses associated with the operations of the business.
• Total expenses . The sum of all overhead and labor expenses required to operate the business.
• Net profit . The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.
• Depreciation . Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
• Net profit before interest . The difference between net profit and depreciation.
• Interest . Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.
• Net profit before taxes . The difference between net profit before interest and interest.
• Taxes . Includes all taxes on the business.
• Profit after taxes . The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.

Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.

Cash Flow Statement

The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.

Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.

The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you'll need to include in the cash-flow statement and the order in which they should appear are as follows:

• Cash sales . Income derived from sales paid for by cash.
• Receivables . Income derived from the collection of receivables.
• Other income . Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
• Total income . The sum of total cash, cash sales, receivables, and other income.
• Material/merchandise . The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
• Production labor . The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
• Overhead . All fixed and variable expenses required for the production of the product and the operations of the business.
• Marketing/sales . All salaries, commissions, and other direct costs associated with the marketing and sales departments.
• R&D . All the labor expenses required to support the research and development operations of the business.
• G&A . All the labor expenses required to support the administrative functions of the business.
• Taxes . All taxes, except payroll, paid to the appropriate government institutions.
• Capital . The capital required to obtain any equipment elements that are needed for the generation of income.
• Loan payment . The total of all payments made to reduce any long-term debts.
• Total expenses . The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
• Cash flow . The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
• Cumulative cash flow . The difference between current cash flow and cash flow from the previous period.

As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn't have to be long and should cover only key points derived from the cash-flow statement.

The Balance Sheet

The last financial statement you'll need to develop is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:

To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, you'll need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.

As mentioned, the balance sheet is divided into three sections. The top portion of the balance sheet lists your company's assets. Assets are classified as current assets and long-term or fixed assets. Current assets are assets that will be converted to cash or will be used by the business in a year or less. Current assets include:

• Cash . The cash on hand at the time books are closed at the end of the fiscal year.
• Accounts receivable . The income derived from credit accounts. For the balance sheet, it's the total amount of income to be received that is logged into the books at the close of the fiscal year.
• Inventory . This is derived from the cost of goods table. It's the inventory of material used to manufacture a product not yet sold.
• Total current assets . The sum of cash, accounts receivable, inventory, and supplies.

Other assets that appear in the balance sheet are called long-term or fixed assets. They are called long-term because they are durable and will last more than one year. Examples of this type of asset include:

• Capital and plant . The book value of all capital equipment and property (if you own the land and building), less depreciation.
• Investment . All investments by the company that cannot be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
• Miscellaneous assets . All other long-term assets that are not "capital and plant" or "investments."
• Total long-term assets . The sum of capital and plant, investments, and miscellaneous assets.
• Total assets . The sum of total current assets and total long-term assets.

After the assets are listed, you need to account for the liabilities of your business. Like assets, liabilities are classified as current or long-term. If the debts are due in one year or less, they are classified as a current liabilities. If they are due in more than one year, they are long-term liabilities. Examples of current liabilities are as follows:

• Accounts payable . All expenses derived from purchasing items from regular creditors on an open account, which are due and payable.
• Accrued liabilities . All expenses incurred by the business which are required for operation but have not been paid at the time the books are closed. These expenses are usually the company's overhead and salaries.
• Taxes . These are taxes that are still due and payable at the time the books are closed.
• Total current liabilities . The sum of accounts payable, accrued liabilities, and taxes.

Long-term liabilities include:

• Bonds payable . The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
• Mortgage payable . Loans taken out for the purchase of real property that are repaid over a long-term period. The mortgage payable is that amount still due at the close of books for the year.
• Notes payable . The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
• Total long-term liabilities . The sum of bonds payable, mortgage payable, and notes payable.
• Total liabilities . The sum of total current and long-term liabilities.

Once the liabilities have been listed, the final portion of the balance sheet-owner's equity-needs to be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors when evaluating the company. Many times it determines the amount of capital they feel they can safely invest in the business.

In the business plan, you'll need to create an analysis statement for the balance sheet just as you need to do for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.

Source: The Small Business Encyclopedia , Business Plans Made Easy, Start Your Own Business and Entrepreneur magazine.

Business Plan Guide

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The 5 Key Elements Of A Good Business Plan

22 January 2020

Although some Founders are sceptical about planning too far ahead for their businesses, preparing a solid business plan is necessary for many purposes.

As any founder knows, the only sure thing about running a growing company is change.

In fact, your business plan is perhaps the thing that will change most often throughout your entrepreneurial journey.

Although some Founders are sceptical about planning too far ahead for their businesses, preparing a solid business plan is necessary for many purposes, including, but not limited to:

• Raising finance through investment;
• Applying for a business loan;
• Budgeting for the long and short term;
• Gaining a deeper understanding of how your business works.

Perhaps even more important than preparing a business plan, is making sure that this is updated for each of the small and big changes that your company will go through as it grows and evolves.

Different companies require different types of business plan. Depending on your business model, your revenue structure and many other factors.

However, there are 5 elements of a business plan that are absolutely key to making sure that the reader understands how your company works and plans on growing.

Download our editable Business Plan Template

It includes a complete structure , detailed instructions on how to write each section and tips on how to tweak it for each specific use .

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1. Executive Summary

The Executive Summary represents the reader’s first impression of your business

The Executive Summary is the first section of your business plan, and also the last one you should write. It represents the reader’s first impression of your business . As a result, it will likely define their opinion as they continue reading the business plan.

A good Executive Summary includes key facts about your business such as:

• Business & product description;
• Current positioning & targeting;
• Financial outlook & requirements;
• Past and future achievements & goals.

However, the most important function that a great Executive Summary serves is communicating to the reader why they should read the rest of the business plan , and why you want them to.

2. Business Overview

After the Executive Summary, a business plan starts with a comprehensive explanation of what your business proposition is and how it relates to the market where your company operates.

In this section of the business plan, you should explain precisely:

• what your company does;
• what are its products or services;
• in which market it operates;
• who are its customers.

When describing your business, you should make sure to that the reader knows what kind of market environment your business operates in, but also how it can thrive in such an environment from a competitive point of view.

For some very niche or particularly innovative sectors, this may mean that you need to inform the readers about specific market dynamics .

In these cases, make sure that you clarify what is considered ‘the industry standard ‘ in your sector, the selling points that current players are competing on and how your business is positioned relative to them.

Make sure to include:

• Your mission statement;
• The philosophy, vision and goals of your company;
• Your industry and target audience;
• The structure of your business, detailing your customers, suppliers, partners and competitors;
• Your products and services and the problem they solve;
• Unique Selling Point(s).

If the company already has a well-defined product or service, this section can be divided into Company Description and Products & Services .

3. Sales & Marketing Strategy

This section of the business plan requires a deep understanding of your market space and how your business positions itself within its niche and competes with existing players .

Within your Sales & Marketing strategy, you should outline:

• A definition of your target market – include its size, existing and emerging trends and your projected market share;
• An assessment of your market – this should summarise how attractive your target market is to your company and why, Porter’s Five Forces or the more recent Six Forces Model are useful tools to define this;
• Threats & Opportunities – you can use a SWOT Analysis to present these;
• Product/Service Features – once you have thoroughly described your product/service, make sure to highlight its Unique Selling Points, as well as any complementary offerings and after-sale services;
• Target Consumers – whether you’re a B2B or B2C company, it’s a good idea to include an ideal customer profile to describe exactly what niche(s) you are going to target;
• Key Competitors – research and analyse any other players inside or outside your market whose offering might compete with you directly or indirectly;
• Positioning – explain in a short paragraph how your company differentiates from your competitors and how it presents itself to your target niche;
• Marketing Plan & Budget – outline the marketing and advertising tactics you will use to promote your business, giving an overview of your brand and of the communication elements that support it;
• Pricing – explain how your pricing strategy fits within the competition and how it relates to your positioning;

A very common mistake that should be avoided is writing that you have no competition. Instead, you should show your efforts in researching your competitors and assessing how they could threaten your business .

4. Operations & Management

This section gives you the opportunity to explain to the reader how your company does things differently .

The people and processes that are allow your business to operate on a daily basis are the key to your competitive advantage . In fact, they help you build a better product, deliver it more efficiently or at a lower costs. Your Operations & Management must be able to successfully realise what you ‘promised’ in the previous sections.

Here, you must demonstrate how much you know about your business, so don’t leave out any relevant detail. Be concise but thorough, focus on two main points:

• Production or Service Delivery;
• Quality Control;
• Credit policies;
• Legal environment;
• Organisational Structure – this is an overview of all the people involved in your business and their position in relation to each other. You should detail the experience of the existing team, as well as the roles that haven’t been filled yet. Include advisors and non-executive directors . Investors and banks will also look at this section to get an idea of salary costs. As these are normally a significant cost centre, don’t overestimate your staff needs.

5. Financial Plan

Your Financial Plan is possibly the most important element of your business plan . This is especially true if the business plan is aimed at investors or lenders.

This section includes projections, budgets and goals that are unique to each business. In particular, you should focus on explaining the assumptions on which you based your forecasts , more than on the forecasts themselves. Every good Financial Plan will include:

• 12-month Profit & Loss Projection – A month-by-month forecast of sales, operating costs, tax and profits for the following year. Sometimes three years.
• Cash Flow Statement & Forecast – This financial statement tracks the amount of cash that leaves or enters the business at any given time.
• Breakeven Analysis – This is a cornerstone of your business plan. Here you should show what level of projected sales allows the business to cover its costs.
• Capital Requirements – This point is fundamental as it shows investors what their money will be spent on. It should contain a summary of all the expenses for big purchases and day-to-day running costs.

The Financial Plan is usually followed by the Appendices. Here you should include detailed spreadsheets and calculations used to prepare the financial statements.

We help Founders write a solid business plan by supporting them with financial planning and forecasting .

Request a call to find out how we can help you.

The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.

Business Exit Planning

15 February 2023

Pre-exit planning accelerates the sale process, increases the likelihood of a successful business sale, and maximises the value received at closing.

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