In the third quarter of 2016, over 240,000 businesses were formed with at least one employee. In the same period, 215,000 establishments exited. To put this in context, you can expect at least one company to fail for every business that started.source
If you are looking to start a new business, it should be clear that the odds are not in your favor.
However, let's not give up just yet. In 2016, a Harvard business study found that founders who write business plans are 16% more likely to achieve success than the otherwise identical non-planning entrepreneur. source
Taking a data-first approach, we bring you a comprehensive guide to writing a business plan for your startup to increase the odds of your business success. This article covers the inner workings of the standard sections of a business plan and provides a fresh perspective on how one could address each area.
Everyone has a plan until they get punched in the mouth. - Mike Tyson
Purpose & Characteristics of a Business Plan
At its core, a Business plan is a sales document. Whether aimed to convince yourself or your investors, your business plan must tell a very compelling story. We believe that this is achieved when your business plan can answer these fundamental questions:
- What is the problem/need your business is addressing?
- What is your solution?
- Who has this problem/need?
- How significant is this problem/need?
- What value does your solution offer compared with other solutions?
- How will you provide your solution to those that have the need?
- Why will your target users purchase this solution?
- How will you make money?
- How much money will you make?
The answer to these questions defines your business and the direction your business should go.
It is also essential to know that business plans are living documents. This means they are constantly changing. Therefore, expect to see many versions of your plan. We like to think of it as so, whenever your response to any of the questions we've listed changes, then your business plan will change.
Hence, you may find yourself revising the business plan due to its dynamic characteristic.
In summary, the story that your business plan tells must be convincing. You should convince yourself and others that your business is viable and financially sound.
This section is unique as it is the primary section read investors. This is because it recaps the outline by highlighting the critical points of the business plan, such as:
Defining the problem or need in the market
The first thing you want to think about is the problem. This is the core reason for the existence of the business venture. The problem can be aspirational, forthcoming, or lived. Aspirational problems are ones where your consumers, in their own words, wouldn't categorize as a problem but an aspiration to make their given situation better.
Future problems are the most dangerous of the three; these are problems that you foresee. They do not exist yet, but at a later date, they will. Lastly, and by far the easiest, are lived problems. These problems are problems your consumers are currently experiencing.
As a business, it's critical to understand the problem and not just the result of the problem, or what we like to call symptoms, to craft the best possible solution.
Describing the solution being offered by the business
A good solution explains what your business does and offers to the market to make the problem disappear. Notably, the solution should be expressed in a way that resonates with your customers, demonstrating a direct connection to the issue being addressed and its advantages.
Describe target customers
The people facing the problem within the market and how they are involved in curating a solution that suits the people.
Describe the magnitude
Describe and define the problem and the solution quantitatively.
Monetizing the problem
How will your business make money? Generally, this should be the way that has the highest correlation or linkage to the problem, customer segment, and most important. Be sure to include the profits at the transactional level.
Describe the business highlights
A brief of the business, i.e., how it started and by whom, its mission and vision statement, its history, and the products or services provided.
A point to note in the description part of the summary is the temptation to use jargon or technical language that might lose the reader. To safeguard your business plan from this, use simple and common everyday words to describe the business plan. If it's hard for you, seek the assistance of friends that have a rich vocabulary of words, an editor, or even online tools like Thesaurus.com
While online information is never a substitute for first-hand experience and discussions with customers and experts, online information is a very valuable resource for analyzing industry structure and trends, estimating market size, analyzing competitor positioning, obtaining macroeconomic data on a country you wish to enter, and a broad range of other topics.
The market analysis covers the industry the business operates in (as there are several industries within a market), the customers, and the competition. It's important to note that this business plan section is the heart of the business plan.
When it comes to the analysis of the industry your business is in, it's not only helpful, but it's necessary to perform market research of your business which entails primary and secondary research.
This refers to the first source of data. Examples of early data sources include interviews, focus groups, surveys, and observations you conducted.
This refers to sources where you gather your data from OTHERS. Examples include publications, the internet, and analyst reports. As you collect your data, it's essential to cite your data sources in the business plan. At the end of this ebook, we provide online resources to help you get started in your market research.
The other critical part of this section is an analysis of the industry. A good question to ask at this point is: "What industry does my business or will my business operate under?" the reason for this is so that as a business owner, you have a proper understanding of your environment as this provides you with a competitive edge.
As you conduct the analysis, you'll come across trends that tend to define the industry at a given point in time that may change in a couple of years. Factors that affect trends include things such as; government regulations, growth projections, division of market share among competitors, etc.
Hence, the need to be observant of the trends within the industry as they may propel the business forward or see it to its downfall. Another essential element of your market analysis is the customer. It's hard not to overemphasize the importance of understanding the customer. The customer here could be an individual consumer, a business entity/corporation, or the government.
In the case of all three, each has its own set of characteristics that will prove to be resourceful when attempting to understand the field in which the customer operates. In the example of an individual consumer, variables such as location, age, income level, and education level all affect their ability to buy or sell the product or service you offer as a business. Regardless of your customer, ensure that you have a laid-out plan of how the business's product and service will reach them.
Another critical aspect to note in the business plan is to know who your target market is. A target market is the part of the market share that your business can provide the solution to, whether through a product you offer or a service you render. Target market identification is crucial as it, in a sense, creates the market niche for your business. This means that your business market is segmented or narrowed down to the people and entities directly affected by it.
As in every robust business plan, a competitive analysis makes for a part of it. A competitive analysis is a breakdown of your business's strengths, weaknesses, opportunities, and threats. In summary, it's put down in an acronym S.W.O.T analysis. The analysis also describes the competing products and companies within the industry. Finally, in the target market section, it's essential to explain how you will compete (your complete strategy) and why customers will purchase your product and service.
Here are some steps that will help you compose a resourceful competitive analysis.
- Identify what you will do with the information found. For example, are you preparing a business plan for a new venture, analyzing a new opportunity, making a decision to enter a new market, or conducting a strategic review of the business model for your business.
- Identify what you already know and what you need to know.
- Identify potential sources you can use to find the information you need.
- As you search for online information, it's essential to list critical sources and the path taken to find them.
- Using online databases can be tricky. Sometimes it's tough to find information that answers your specific questions. Other times, it's tough to master the search interface across different databases. If it's the first time you are using a particular database, we recommend you review the "Help Tips" before beginning your search.
- When you are done with your research, synthesize what you have learned by asking the following questions:
- What information were you able to gather that helped you accomplish the purpose of your research, and where did you find the information?
- Did the information you found to increase or decrease your uncertainty about crucial factors that influence (or will influence) your business performance today and in the future?
- What other things would you like to know?
- How did your research influence the types of questions you are currently asking about your business or opportunity?
- How will you use online information sources to analyze your business environment and potential business opportunities in the future?
The following questions may help you determine the validity of accessible Web content:
- What type of individual or organization produced the site?
- Is an author listed? If so, what are the credentials of the author?
- Is there a bias or a commercial interest?
- Who is the Web site's target audience?
- How current is the information?
- Are references, citations, or links to other resources included?
This section of the business plan is, by large the execution phase. It details the strategies to actualize the dream.
This section is characterized by the marketing strategy, which entails the business/revenue model, strategy for market entry, strategic partnerships, expansion strategy, i.e., new market segments, and the pricing model, which consists of the 4 P's: Pricing, Positioning, Promotion, and Place.
As a business owner, you define the price at which you will sell your product and service. This section outlines what you all are charging your customers.
We believe positioning your business should be about building an emotional connection with your customers. So, in this section, see it as your opportunity to demonstrate your understanding of your customer's pain points, your value proposition, and your differentiators.
How will you market your products and services? How do you activate people? How do you get them aware of their problem? In some cases, you have to teach them that the problem exists. Then, what mechanism are you going to use to get their eyeballs, their attention, and to close the deal?
How will you get the products and or services to your customers?
A set of questions that will enable you to develop the operational part of the business plan include:
- How will you get from here to there?
- How are you going to build your product and service?
- How will you finance the development of the product and service?
- How will you get the products and services to the intended customers? What are your responsibilities after the sale?
These questions are not exhaustive, but they do provide you with the framework of what to look at. There's a lot more to this, but these are the basics of market analysis and operations.
Like any other business enterprise, there have to be individuals in charge of the business enterprise and not just any individual, but individuals who carry the enterprise's mission and vision and have the necessary qualifications to run the business. Therefore, management is a team of people involved in the planning and running of the business. Whereas there are numerous situations where only one person starts the business (a sole proprietor), it doesn't mean the company is off to a bad start.
As the business grows, it's imperative to get a team of people that can assist in the daily management of the business so that it's manageable for you as the founder and diversifying the company's strength through the skills, talents, etc. knowledge of others. A critical piece to include in the business plan under the management section is the bio or profile of the individual team members. For example, the biography could consist of their expertise, education, experience, etc. This stands to give your business plan credibility, especially to potential investors.
Last but not least of all the tips covered in the financial plan.
The financial plan details how and where the funds are accessed and its accountability. There are several financing options, such as Personal funds, Non-dilutive sources, and Dilutive sources.
Just as the name suggests, these are funds sourced from the individual business owner’s sources of capital. Examples include loans/debt financing, savings, credit cards, etc.
Non-dilutive sources include grants and sponsorships that fund your business.
This includes funds sourced from friends, family, angel investors (an angel investor is an accredited investor who uses their own money to invest in small businesses), and venture capitalists (this is a person or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds).
Below is a sample table that’s a breakdown of the different sources of capital or funds for a small high-tech firm.
A financial statement is the formal record of a business or person's economic activities and position. This includes items such as the cash (known as short or liquid assets), non-cash items that have been invested in the business (these are known as mid-long term assets), and the liabilities such as expenses or obligations that reduce the economic benefits of the company.
With that definition, what's a viable business without financial statements? Unfortunately, most business starters tend to think that they won't need technical and complex financial information such as the ones we see in corporations' annual or bi-annual financial reports.
The truth of the matter is, no matter how small your business is, you need to maintain your books of accounts to be in the loop of the company's financial performance or profitability. Hence no one is exempt from this. Examples of joint financial statements include The balance sheet, Income statement, and Cash flow statements.
The Balance sheet is simply a record of the assets and liabilities within a business.
The Income statement is a record of the income and expenses of a business that is calculated to show whether the company is operating at a loss or a profit. The Income statement was formerly known as the Profit and Loss statement.
The Cash Flow statement is the financial statement that summarizes the amount of cash and cash equivalents entering and leaving a business.
We won't get into the details of the financial statements. But, still, the point is to have an idea of what's expected of you as a beginning business owner or growing business owner as far as the management of the finances is concerned.
Suppose the business needs to liquidate or close down to either exit entirely or shift the business model. In that case, there are means to convert the company into liquid cash, such as: calling for an Initial Public Offering (IPO). An IPO is merely inviting the public to purchase the company's shares in exchange for cash. However, this mainly applies to established businesses and may be far from the reality of a starting business.
The other option is selling the business to an acquisition partner interested in the industry. A good question that can guide you in this phase is, "What prices are being paid for similar businesses?" This can advise you as to the price to tag your business at.
That's just the tip of the iceberg. Feel free to schedule a call with us to learn how we can help you flush out your business plan for your tech startup.