How you can create an effective business plan

When an entrepreneur has identified a potential business opportunity, the next step is developing a business plan for the new venture.

What exactly should the new plan contain?

How can the entrepreneur ensure it has the substance to find interest among would-be investors?

Wharton management professor Ian MacMillan explains that business plans must contain several crucial elements: They must articulate a market need; identify products or services to fill that need; assess the resources required to produce those products or services; address the risks involved in the venture; and estimate the potential revenues and profits.

An edited transcript of the interview appears below:

What exactly is a business plan?

Ian MacMillan: A business plan to me is a 25-page, maximum 30-page, document, which is a description, analysis and evaluation of a venture that you want to get funded by somebody. It provides critical information to the reader— usually an investor — about you, the entrepreneur, about the market that you are going to enter, about the product that you want to enter with, your strategy for entry, what the prospects are financially, and what the risks are to anybody who invests in the project.

Could you explain some of these elements and describe how entrepreneurs can develop an effective business plan?

Let me start by saying that you probably want to avoid developing a detailed business plan unless you have done some initial work. Basically, what happens is that by doing a little bit of work, you earn the right to do more work. The first thing I would do before you start a business plan is think about a concept statement. A concept statement is about three to five pages that you put together and share with potential customers or investors just to see if they think it’s worth the energy and effort of doing more detailed work.

The concept statement has a few pieces to it. You are going to have a description of the market need that has to be fulfilled; a description of the products or services that you think are going to fulfil that need; a description of the key resources that you think are going to be needed to provide that product or service; a specification of what resources are currently available; an articulation of what you think the risks are; and then a sort of rough and ready estimate of what you think the profits and profitability will be.

Assuming the concept statement works out and you want to move towards the business plan, what else would you need? And where can you find the information? Some information can be hard to locate, especially about your competitors.

It’s really important to go out and speak to your potential customers. You need to find the people who you think will buy your product and talk to them about what dissatisfies them with their current offerings. You should get a sense from them about who is providing the alternative at the moment. Remember, the world has gone for maybe 100,000 years without your idea — and people are getting by; they’re not dying. So what is the closest competitive alternative to what you want to offer?

That is what you need to find out —and that involves talking and listening. And for all the enthusiasm you have for your venture or your idea, you really need to listen to people who are eventually going to write a check for it.

Before you go on to write a business plan, you have to do some more work. If the concept statement looks good, then the next step is to do a 15- to 20-page feasibility analysis. This means we are now going to take this idea to the next level. The next challenge you face is to say, well, if you start this business, what evidence do you have that the market actually wants it? Who do you think would write a cheque for your product? You need a description of how you intend to enter the market, a description of who the major competitors are, a preliminary plan — a very rough plan—which specifies what you think your revenues and profits are going to be, and an estimate of what you think the required investment will be.

Once you have done your feasibility analysis and assuming you get the go ahead from your stakeholders, what is the next step?

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.

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