How to Write a Business Plan (2021)

Business owners make many mistakes when they have a business idea, start a new business, and rush into things before considering the important aspects of their business. A good business plan can help you plan so that you can anticipate important issues and possible challenges before you start your business.

A business plan a vital part of any new venture. Your business plan doesn’t need to be 100 pages long. Keep it short and concise and focus on the key details.

Studies show that entrepreneurs who take the time to write a business plan are 2.5 times more likely to follow through and get their business off the ground. The work that goes into creating a good business plan also helps new entrepreneurs build skills that will be invaluable later.

When you write your business plan, the executive summary should answer these 6 questions as succinctly as possible:

1. What is your product or service and what problem are you trying to solve?


2. Who is your target audience?


3. Who is on the management team?


4. Who are your competitors?


5. What are your current financial details and financial projections?


6. What are your funding requirements?

Let’s look at each of these questions in some detail.

What is your product and service and what problem are you trying to solve?

This is your elevator pitch to explain why your company should exist. This should just be a couple sentences that are clearly articulated. Explain the pain that a specific group of people are experiencing and how your company will fix the problem.

Who is your target audience?

Explain who you expect to buy your product or service. Be as detailed as possible. You could include demographic information like gender, age, location, job title, economic status and/or behavioral information like beliefs, hobbies and routines.

Quickly summarize how large this target market is. The reader may not realize this is a big enough market for a business.

Who is on the team?

Ideas are worthless. It’s the proper execution of those ideas and your business concept that creates value. Build confidence in your company by explaining who is behind it (especially the management team) and what makes them qualified to run the company. Share the management team members successes, expertise and core motivations for running the company.

Who are your competitors?

Identify your competitors and how you will differentiate. Are you competing on price, customer service, quality, more convenient location or something else?

What are your current financial details?

For existing businesses provide your current sales. For new businesses provide financial projections and aspirational sales targets.

What are your funding requirements?

Assuming your business plan is to raise funding you need to quickly summarize the amount of funds you need and what the money will be used for.

Fictional Company: On Site Gym

On Site Gym is a fitness instructor that comes to your home or place of business with all the equipment you need to meet your strength or cardio fitness goals.

Our target market are people making $80,000+ per year who do not have a full gym at their home or office. We schedule appointments from 5am to 10pm to meet the needs of busy professionals at a time that is convenient to them.

We offer text based reminders, tips and encouragement to shape a healthy lifestyle before the workout and on off days.

We have 20 clients paying monthly for the past 3 months.

We have 2 effective marketing strategies that have led to a growth loop in additional customers:

1. A reduced plan if a neighbor or coworker signs up for a class before or after the client’s scheduled time at their home or business. This reduces our drive time to the next appointment and allows us to reach more people at a business or neighborhood.

2. A reduced plan if another family member works out at the same time as the client. This allows us to effectively increase our per session price for the same time and equipment.

50 percent of our clients either add a spouse or refer a neighbor/coworker who signs up for a session adjacent to their time.

The business is owned and operated by Rob Swalling who was a Crossfit gym instructor for 5 years.

The owner has personally invested $50,000 to purchase the vehicle and gym equipment.

We are seeking an additional $50,000 to purchase an additional vehicle and gym equipment to offer multiple appointments at the same time. We have turned away clients who only have availability that conflicts with an existing client’s appointment.

The opportunity section of a business plan includes:

• The problem and current solutions


• The size of the target market - TAM, SAM and SOM (defined below)


• Competitive analysis


• Milestones and traction


• Key assumptions and risk

Now it’s time to show the size of the target market for your new products and services and each relevant market segment in that target market. Business plans that carefully lay out this information in a detailed market analysis appear more credible and will better prepare you for success with your new business. ANd, potential investors and banks tend to trust business owners more when they see a detailed market analysis in a business plan.

There are multiple methods for conveying this data referred to as TAM, SAM and SOM.

TAM is the Total Addressable Market. This shows investors the total yearly revenue opportunity or units sold for your product or service if you achieved 100% of the available market. It’s a quick way to address the potential size of the space you are operating in.

SAM is the Serviceable Addressable Market. This is the subset of TAM (Total Addressable Market) that you intend to serve with your service or product.

SOM is the Serviceable Obtainable Market. This is the subset of SAM (Serviceable Addressable Market) that is realistic to achieve.

You’re starting a lawn care company in Chicago.

Your TAM is every home or business in the city with some form of landscaping need. Let’s say this represents 500,000 potential clients.

Your SAM are perhaps residential yards of at least 1,000 square feet. Let’s say this is 25,000 potential clients. This means your SAM is 5% of your TAM.

But your company is just 3 people with 2 trucks. You figure you can cut 250 unique yards a month. So your SOM is 1% of your SAM.

The SWOT analysis is a four part strategy to uncover Strengths, Weaknesses, Opportunities and Threats in your business model.

These are divided into a simple 2x2 square grid with each square representing one of the components.

Strengths and weaknesses are internal to your company and can be controlled.

Opportunities and threats are external to your company which you can respond to but not directly control.

Weaknesses:

• Poor physical location


• Gaps in skills on the management team


• A poor reputation


• Exclusive partnerships


• An unknown brand


• No system to add new sales


• A low barrier to entry to your industry


• A recognizable brand


• A vague or missing value proposition

Threats:

• An increase in competitors


• Regulatory changes that will make your business harder to operate


• An unstable supply chain


• Technology improvements that render your service less valuable


• Changing consumer behavior that will impact your business negatively

A proper SWOT analysis should involve a cross-section of your team. You want people who have different perspectives on the company and should include people from sales, marketing, product development, engineering, etc.

In fact, some companies even invite customers to participate in a SWOT analysis.

Importantly, while you should include others, company leaders and founders should be deeply involved in a SWOT analysis as they create the overall vision for the company.

There is a big difference between a new business pitching an untested idea and one that already has some success selling the product or service.

This success is called traction and the more traction you have (including a history of growth rates) the more investors reading your business plan will feel you are less of a risk.

Business plans take many different approaches with milestones and traction. Examples of traction can include: sales, delivery and positive reviews from an existing product or service, recurring purchases, presales of your product or service, sales agreement contracts, and surveys indicating a desire to purchase. Although it’s difficult to project years ahead, you should look for ways to project your growth rates three to five years into the future.

This section of the business plan includes:

• Positioning statement


• Pricing strategy


• Packaging


• Partnerships


• Sales and marketing channels


• Packaging


• Operations

This is the part of the business plan where you explain how you will make money.

What you intend to charge for your product and your pricing model help inform the health of your business plan.

Will you charge per project, an hourly rate or a recurring revenue subscription?

Charging your customers on a regular basis with a subscription plan helps keep your revenue predictable and is a sought after business model among investors.

Do you plan to offer a free subscription or trial that will serve as a lead generation tactic?

Are there opportunities to up-sell beyond the initial product?

There are several pricing strategies to follow when trying to determine if you have the correct price.

Value pricing. Price your service not based on how long it takes you to deliver but how much value you provide the client. If you have developed a system that creates $1,000 in revenue for a business but it only takes you 60 minutes to perform the task you could charge $500 because you focusing on the value you are creating for the client and not your hourly rate.

Cost plus. Determine the cost in time and materials that it takes to deliver the service and add a percentage on top for profit.

Market pricing. Look at what current businesses are charging for a similar service as part of your market analysis and base your price around this number.

Freemium. You plan to give away your product for free. This is when you plan on making money by selling your customers attention (ads) or data. It might be chosen when you are building your company for acquisition and want a large user base.

Pay what you want. If you don’t have a lot of fixed costs and there is not a strong baseline for the rate of your product you could allow customers to pay what they think is fair. Studies have shown on average you can get paid more than what you would make if you set the price yourself.

Your marketing plan should include what marketing channels will you primarily rely on for your traffic?

Potential marketing channels could include: advertising, affiliates, email, social media, referrals, organic Traffic, cold email.

Get specific on the types of campaigns you plan to run in these primary channels for new clients.

Can you show evidence of these channels working for similar companies or those targeting the same audience?

And, remember to include industry trends as those will be relevant to your ability to launch and grow your business.

When starting your own business, one of the first decisions you’ll make is how to legally structure the business.

There are many different types of legal structures for various business entities. For new business owners, choosing the best business structure for your business can feel overwhelming.

Don’t rush into making a decision. Instead, spend some time reading about each possible entity your business might fit into. Consider which structure is most helpful for your business, and how each structure can help you accomplish your professional and personal goals.

Consider the following issues when deciding on what type of entity to register:

• What are the potential liabilities/risks?


• What are the anticipated tax benefits from being taxed as a partnership as opposed to a corporation?


• Do you intend to have outside investors?


• Do you anticipate selling your company in the near future?


• Are you pursuing a risky business where you might be sued?


• Are you willing and able to keep up with the periodic filing requirements that certain types of entities (corporations) require?

Each business type has its own personal asset protection, tax laws, and operational implications. Understanding your business needs and how the various business entity types affect your business will play a key role in your company’s overall success.

If you have a physical business location that serves customers or employees go into a little detail in this section. Sometimes a physical location can help attract strong employees, offer stronger tax incentives or serve as a more ideal place to attract your customer.

The financial plan section of the business plan includes:

• Sales forecast


• Personnel expenses


• Financial statements (including income statement or profit and loss statement)


• Cash flow statement


• Balance sheet


• Use of funds


• Exit strategy

Your sales forecast is the revenue you anticipate earning over the next several years selling your products or services. This should be broken down by each core product or service category you offer. For example, a landscaping company might have a specific row in their sales forecast for lawn mowing, snowplowing and landscape design services.

There should be an additional row for each product offered that details the Direct Costs or Cost Of Goods Sold (COGS). These are the direct expenses incurred for offering the service. For the landscaping company that might be the lawnmower, fuel and employee.

The Profit and Loss Statement or P&L shows if your company is making a profit and at what time you expect to be profitable and earning net income.

The P&L aggregates the data from the sales forecast, the personnel expenses and your ongoing expenses to create a monthly view of your company's financial health.

A P&L is a spreadsheet that includes the following:

• Income. Taken from your sales forecast and includes all revenue generated by the business.


• Cost of goods sold (COGS). Taken from your sales forecast and includes the total expense for offering your product or service.


• Gross margin. Simply subtract your COGS from your sales to get this number. It is most acceptable to show this number as a percentage of total sales. (gross margin / sales = gross margin percent).


• Operating expenses. List all of your expenses associated with running your business. This includes salaries, research and development, marketing, and other expenses. Do not include COGS that you already identified. Do not include taxes, depreciation, and amortization as you will list that in its own section.


• Total operating expenses. Add all of your operating expenses identified above.


• Operating income. Also known as EBITDA, (Earnings Before Interest, Taxes, Depreciation, and Amortization). Just subtract your total operating expenses and COGS from your sales.


• Interest, taxes, depreciation, and amortization. Include any of those expenses in this location.


• Total expenses. The total expenses is the sum of your operating expenses plus the interest, taxes, depreciation, and amortization.


• Net profit. This number shows whether you made a profit or loss in a given month or year.

The balance sheet is a snapshot of the company’s health right now. It includes the assets and liabilities of the company and the owner’s equity.

Assets. Assets are divided into three categories, current, fixed, and other assets. Current assets are either cash or those items that can be converted to cash within one year like stocks, inventory and account receivables. Fixed assets are tangible like vehicles, machinery, property and furniture. Other assets don’t fit neatly above and might be life insurance cash value or long term investment properties.

Liabilities. There are two types of liabilities, current and long-term. Current liabilities are debts due under one year can include accrued payroll, short term lines of credit and taxes payable. Long-term liabilities are debt due greater than one year and can include bank debt and shareholder loans.

Owner’s equity. This is the share of assets that are allowed to pass to the owner(s) after liabilities are paid.

Investors will want to know how they can recoup their investment and create a profit.

What is the timeline to either sell your company to the public in an IPO or to a private company.

Are there specific companies your business would be a valuable asset? Are you building a company and product that will be attractive to a specific buyer? How long will it take before you can approach this buyer to suggest an acquisition of your company?

If you are not seeking angel investors or venture capital then you can skip this part.