How you can create an effective business plan

The idea of the business plan is to convince the stakeholders. First, what we need to do in a business plan is show that we understand the needs — the unmet needs— of potential customers. Second, we need to understand the strengths and weaknesses of the current most competitive offering out there. Third, we need to understand the skills and capabilities that you and your team have as entrepreneurs. Next we need to understand what the investors need to get out of their investment.

The most important idea in the business plan is to articulate and satisfy the different perspectives of various stakeholders. Probably, a third of the ventures out there that fail are because some person came up with the right product that they thought the world would love and then found out that the customers couldn’t care less.

What you want to try to do in a business plan is convince the reader that there are customers out there who will in fact buy the product —not because it’s a great product, but because they want it and they are willing to pay for it. Now let’s look at the various components of the business plan document:

First, you need an executive summary that grabs the attention of the potential investor. This should be done in no more than two pages. The executive summary is meant to convince the potential investor to read further and say, “Wow! This is why I should read more about this business plan.” Next, you need a market analysis. What is the market? How fast is it growing? How big is it? Who are the major players? In addition, you need a strategy section.

It should address questions such as, “How are you going to get into this market? And how are you going to win in that marketplace against current competition?”

After that, you need a marketing plan. How are we going to segment the market? Which parts of the market are we going to attack? How are we going to get the attention of that market and attract it to our product or service? You also need an operations plan that answers the question, “How are we going to make it happen?” And you need an organisation plan, which shows who the people are who will take part in the venture.

You need to list the key events that will take place as the plan unfolds. What are the major things that are going to happen?

Remember that you will not get all your money up front. You will get your funds allocated contingent on your ability to achieve key milestones. So you may as well indicate what those milestones are. You should also include a hard-nosed assessment of the key risks. For example, what are the market risks? What are the product risks? What are the financial risks?

What are the competitive risks? After that, what you get down to is a financial plan where you basically do a five-year forecast of what you think the finances are going to be .

You need a pro forma profit and loss statement. You need a pro forma balance sheet if you have assets in the balance sheet. You need to have a pro forma cash flow. Your cash flow is important, because it is the cash flow that kills.

Finally you need a financial evaluation that tells investors, if you make this investment, what is its value going to be to you as an investor.

That is basically the structure of the plan.

KNOWLEDGE@WHARTON