Why is it that more than a third of all new businesses fail in the first year? Is it because they lack the right products or services, the proper financing, or is it simply because they didn’t take the time to do a well researched business plan - your road map for success? Even businesses that survive the first year aren’t guaranteed to make it to the five year mark. In fact, evidence shows that an even greater number of businesses fail before arriving at that historic threshold. So, just how important is it to have a clear, concise and well researched business plan? And what is in a business plam? Well, if you want to increase your chances of success, it starts with doing your homework right the first time.
Why do Businesses Fail?
While it’s difficult to point to any one cause, a large number of business failures are due to the inability to derive a profit. The first year is often the most difficult. Many successful businesses point to that first tumultuous year as the beginning of their learning curve. A successful business requires hard work, perseverance and determination. However, even that will only get you so far. You must have a well prepared plan of action, and one that includes all aspects of your company’s success and ability to survive in difficult times. It’s not just about having a plan to survive the first year, but about putting a plan in motion to thrive 5 and even 10 years down the line. Some might read that last statement and feel it’s a little forward thinking, or that we’re getting ahead of ourselves. That’s simply not the case. A well prepared business plan outlines not only how the company will succeed now, but what it must do to secure its long term future.
What is in a business plan?
1. Executive summary
The first part of the business plan is the executive summary or business declaration. Its purpose is to outline the proceeding business plan’s doctrine, approach, market analysis, product or service description, management team, sales approaches, and type of business. Consider the executive summary as a table of contents on what is involved in the business plan. It sets the stage for the remainder of the document.
2. Business description
This part of the document is meant to provide a framework for how the business will conduct itself. It could include where the business is located, how it is structured, and the type of business itself. As an example, if the company wanted to structure its business as a sales agent or distributor for large companies, then it would declare itself a distributor or a distribution channel to market for a specific industry.
3. Management team
This is where the document outlines the company’s management team and ownership. The purpose is to assign responsibilities for both management and employees. It introduces the company’s management team and their appropriate capabilities, in addition to their future roles and responsibilities.
4. Operating Costs
This section involves issues pertaining to operations, including where the business is physically located, and who will assume specific management roles. It outlines some of the day to day operating costs and provides a brief organizational structure for the future company.
5. Product or service description
As the name implies, this is where the company outlines the product or service it intends to sell, and provides a small introduction to the upcoming market and competitor trend analysis. It’s in this specific section that the company will outline why its product or service will succeed, its price points and why customers will be interested in purchasing. It outlines features and benefits and provides insight into the how and why of the product’s future sales.
6. Market and competitive trend analysis
While some business plans separate these two, some lump them together. It’s really dependant upon preferences, but a good rule of thumb is to have them in close proximity to one another as analyzing a given market, goes hand in hand with understanding the company’s future competitors. Performing a thorough market trend analysis is perhaps the single most important aspect of the business plan and the company’s future success. This involves knowing where the market is going, what the need is, how serious the requirement is for the new company, and the interest level of future customers. It’s the groundwork for justifying the company’s future business and entrance to market.
7. Sales initiatives and strategy
This is the strategic portion of the business plan as it relates to the product or service’s future sales success. In essence, this is where the company reiterates its pricing, why the product will sell, and how the company will go about selling it. It’s not simply stating that the product will sell itself, but amounts to clearly defining the strategies specific to the company’s future market, and how that sales strategy will succeed.
8. Product’s profitability statement
In order to have a declaration of future profitability on the product or service, the company must understand its costs as they pertain to manufacturing, operations, salaries and the costs of securing and finding new customers. Companies must know what it costs to find customers. Far too many companies have great products but simply no idea what it costs to find and keep customers. After all, a company could have the best product in the world, but if it costs too much to find customers, then there’s no reason to be in business.
9. Company finances
Whether someone is using the business plan to secure new financing, or to summarize the financing, it is incumbent upon them to outline potential start up costs, and required funding over the first, second and third year of the business. This could include the company’s salaries paid to employees and managers, day to day operating expenses, costs of warehousing and insurance. This section is used to outline where the financing will come from, and how that money will be spent within the first couple of years of the business. If your business already has the financing in place, then use this section to outline and forecast your spending. If your business doesn’t have the financing in place, then this section is where you explain what’s needed and why.
10. Financial statements
This is why the market and competitive trend analysis is so important. This last section ties everything together into one cohesive plan for the company. This is where the company reiterates its market trend analysis and shows how their product will continue to be needed years into the future. It outlines future market and customer demand. Most importantly, it ties this information into the company’s future balance sheets, cash flow statements, and forecasts the company’s 1, 2 and 5 year profit and expenses.
When it comes to succeeding in business, it’s never just a guessing game or based on speculation. It requires in-depth market research and analysis to justify future capital expenditures, investment, and the likelihood that the company will succeed. Companies must be market experts and must have the right business road-map to proceed forward.