The Castleman Law Firm
Q: I'm interested in starting a small business and many people have told me that I need to have a "business plan". What exactly is a business plan?
A: A business plan details the business enterprise's plans and how the owners expect to carry out these plans. This information is used by the management of the enterprise, as well as third parties (e.g., banks, investors and employees) in a variety of ways. There is no set format for a business plan, but certain areas such as marketing, competition, operations and financial planning are always included.
The business plan is a mechanism for you to document what you know about your business, your competitor's business and the marketplace. This process is invaluable to any business, and certainly a prerequisite to starting any small business. As the old saying goes, "If you don't know where you're going, any road will get you there." The business plan is a way to define where you are going and to determine the road you will take to success.
Q: What are some of the elements of a business plan?
A: The business plan should briefly describe the nature of the business. For example, it might be a retail store specializing in women's clothing, a pizza restaurant or a service company which provides training on computer software applications. The plan should include the proposed (or actual) name of the business and provide background information on the principals of the company. The experience and background of the principals, their personal financial statements and their education and experience in the proposed line of business should be provided.
The business plan should describe the market(s) to be served by the business. For example, the potential market could be geographic, in the case of a restaurant or retail store. Or, the market could be demographic, based upon age, gender, income level or other factors. The plan should also identify the enterprise's existing or potential competitors in each identified market, and detail the methods to be used to reach target markets and overcome competitors.
The plan should detail the internal operational procedures to be used. Procedures which describe how or when products and/or services will be delivered to customers and how products or services will be created or provided by the enterprise are the most commonly included.
Finally, the business plan should provide a detailed financial plan. The financial plan should describe the estimated income and expenses of the enterprise, including capital requirements, sources of funding and projections about growth for the next three to five years. Pro-forma (projected or estimated) financial statements, including income statements, balance sheets and cash flow statements, should also be included.
Q: Why does my banker want to see my business plan?
A: If you have applied for a business loan from your bank to finance growth, acquisitions, equipment or working capital, it is likely your banker wishes to see plans which detail how you expect to repay the bank's money. The bank will determine whether your projections and assumptions are reasonable, and that you expect sufficient income from your business operations to service the debt. If your business plan is weak, sketchy or, even worse, non-existent, your loan will most likely not be approved.
My advice to you is to spend plenty of time on refining your business plan to demonstrate the soundness of your idea if you are interested in obtaining a loan from the bank.