A business plan outlines your business strategy and goals. It’s essential for securing funding and guiding growth. This guide will explain the components and benefits of a traditional business plan, and provide step-by-step instructions for creating one.
When it comes to business plans, one size does not fit all. There are two main categories: traditional and lean startup plans. A traditional business plan is detailed and comprehensive, often running dozens of pages long. It follows a standard structure and includes nine sections, making it ideal for sharing with lenders and investors who appreciate a thorough understanding of your traditional business plans.
In contrast, a lean business plan is a shorter, more concise version that focuses on summarizing key points. It’s perfect for personal planning when starting a new small business. This format typically includes only the essential information, making it quicker to create and easier to update.
Recognizing these distinctions helps in selecting the suitable approach for your business. If you aim to secure funding or provide a detailed roadmap for growth, a traditional business plan is the way to go. However, if you’re in the early stages and need a flexible, evolving document, a lean business plan might be more suitable.
Crafting a traditional business plan offers numerous advantages that can significantly impact your business’s success. It acts as a roadmap by:
A well-crafted business plan also aligns your team towards common goals, facilitating better decision-making and ensuring everyone is on the same page. For startups seeking investment or established businesses wanting to stay on course, a detailed business plan is crucial. It not only supports decision-making by outlining objectives and strategies but also increases your chances of securing funding, helping your business grow 30% faster than those without a plan.
Moreover, a business plan can help you identify key elements that might lead to funding opportunities, making it an indispensable tool for growth planning and attracting investors. Regularly updating and revising your plan ensures it remains relevant and responsive to market changes, further enhancing its effectiveness.
A traditional business plan format is composed of several key components, each serving a specific purpose in outlining your business’s strategy and operations. These components include a comprehensive plan:
The marketing plan should go beyond basic tactics, detailing product positioning, pricing, and promotional methods. The sales plan focuses on converting interest into revenue, outlining the sales process from lead generation to closing sales. A competitive analysis allows you to evaluate your position in the market by comparing your strengths and weaknesses with those of your competitors.
A solid financial plan is essential for attracting potential investors, encompassing budgets, forecasts, and a summary of financial health. The organizational structure section introduces key personnel and their roles, highlighting their expertise. In the products and services section, describe your offerings, their development status, and pricing strategies.
Lastly, documentation such as legal papers and professional partnerships should be included to validate your operations and claims.
Writing a business plan is a methodical process that ensures all aspects of your business are thoroughly considered and documented. Start by creating a structured outline with key elements. This outline will serve as a roadmap for building your plan step by step, making the task more manageable.
Using a downloadable business plan template can be incredibly helpful because:
The executive summary is the heart of your professional business plan. It distills the essence of your business, summarizing critical aspects such as business goals, target market, and unique selling points. The primary purpose is to provide a high-level overview that persuades reviewers to delve deeper into your plan.
Essential elements of an executive summary include:
Keep it to one or two pages for maximum impact, considering the needs of the intended audience.
It’s often best to write this section last, after completing the rest of your business plan, to ensure it accurately reflects the entire document.
A comprehensive company overview is crucial for establishing your business’s identity. Begin by clarifying your business’s operational framework and market placement, including details like ownership structure and promotional strategies. Clearly state the business structure, model, and industry to give readers a solid understanding of your enterprise.
Include the following statements:
Detailing your company’s history, short-term and long term objectives, and key business partners, including new business partners, will provide a comprehensive overview of the company’s goals.
Market analysis is a critical component of a successful business plan. It involves conducting essential market research about your market and competition. This research provides insights into customer demands and industry trends, shaping your marketing strategy.
Start by listing some relevant information such as target market, market growth, and industry information. Thorough research is necessary to support your conclusions and illustrate your understanding of the competitive landscape and market trends. This ensures your business plan is well-informed and realistic.
A marketing strategy outlines the rationale behind your marketing efforts and sets long-term goals. Define clear, measurable marketing objectives to track progress and achieve desired outcomes.
Your marketing plan should detail tactical actions that align with your overarching strategy, focusing on how your business idea fits the ideal customer. It should include:
An effective sales strategies is crucial for establishing a unified and successful sales organization. It includes decisions and goals that guide how your sales team promotes the organization and products to attract new customers.
To improve your sales strategy, consider the following approaches:
The management team and organizational structure section should include:
A visual representation, such as a flowchart or organizational chart, can effectively illustrate the hierarchy and reporting relationships within the organization. Even if not all roles are filled at the start, outline each position’s responsibilities and future hiring plans in the business plan.
A detailed description of your products and services is essential for a professional business plan. Clearly present:
Discuss the following aspects:
The operational plan lays out day-to-day business activities, including production methods and inventory management. Explain how pricing will be determined and how orders will be fulfilled.
Daily activities necessary for achieving tactical objectives include:
A financial plan is a cornerstone of a successful business plan. Financial projections demonstrate to lenders how loans will be repaid and outline intended use of funds. Incorporating financial projections enhances the credibility of your business plan.
Include key financial statements: income statements, balance sheet, and cash flow statement. Identify cash shortages to inform contingency funding requirements plans and establish a cash reserve for unexpected events. Realistic financial forecasts are crucial, showing profitability backed by solid data.
A SWOT analysis is a strategic tool for comprehensively assessing your business or product. It stands for:
The main objective is to identify internal and external factors that impact your business, aiding in strategic planning.
By evaluating your strengths, you can leverage what your business does well to gain a competitive advantage. This might include unique expertise, strong customer relationships, or proprietary technology. Recognizing weaknesses allows you to address areas that need improvement or could hinder your progress, such as limited resources or gaps in skills.
Opportunities highlight external factors that your business can capitalize on, like emerging market trends, new customer segments, or technological advancements. Conversely, threats are external challenges that could negatively affect your business, including increased competition, regulatory changes, or economic downturns.
Conducting a thorough SWOT analysis helps you develop strategies that maximize strengths and opportunities while mitigating weaknesses and threats. It also supports making informed decisions about resource allocation, risk management, and long-term planning, making it an essential component of a comprehensive business plan.
Common errors in business planning include:
Key considerations for maintaining a business plan include:
Regularly updating your business plan is crucial for staying relevant in a dynamic market. As market conditions and customer needs evolve, your business plan should reflect these changes to ensure it remains a useful tool for decision-making. Regular updates prevent your plan from becoming stale and allow you to use current data for informed updates.
Consider growth activities, such as launching new products, which often require updates to your business plan. Listening to customer feedback and incorporating technological advancements can also necessitate revisions to enhance operations.
Consider your business plan as a dynamic document. It will change and adapt as your business model canvas and business model company plans grow.
Presenting your business plan effectively can earn you the confidence of potential investors or financial institutions. Focus on clarity and engagement to ensure your audience understands and is excited about your vision. Tailor your presentation to your audience’s specific interests and expectations to make it more impactful.
To structure your presentation effectively:
When planning for your small business, consider the following:
To effectively plan your business:
Creating a traditional business plan is an invaluable exercise that provides a roadmap for your business, aligns your team, and increases your chances of securing funding. By understanding the different types of business plans and the benefits of a traditional plan, you can make an informed decision about the best approach for your business.
The step-by-step guide and detailed sections on drafting an executive summary, creating a company overview, conducting market analysis, developing marketing and sales strategies, and more, ensure you cover all essential aspects of your business. Remember to avoid common mistakes, regularly update your plan, and present it effectively to attract investors and drive your business toward long-term success.
The main difference is that a traditional business plan is detailed and geared toward securing funding, while a lean business plan is shorter and highlights just the essentials for personal planning. So, if you’re looking for flexibility and speed, go with the lean option!
Regularly updating your business plan keeps it relevant to changes in the market and your customer needs. This way, you can adapt your strategies and goals for ongoing success.
A traditional business plan should definitely have an executive summary, market analysis, marketing plan, financial plan, and a SWOT analysis at the very least. Cover these bases, and you’ll be on the right track!
Market analysis can really boost your business plan by giving you a clear picture of customer needs and industry trends, helping you create a smart marketing strategy. It makes your plan more solid and realistic!
Your executive summary should cover your company description, mission, product or service details, leadership info, financial highlights, and growth plans. Keep it concise—one to two pages—and write it after the rest of your business plan to ensure everything flows well.
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You might have heard these grim statistics before: more than 80% of all small businesses fail within 10 years, and more than 80% of those businesses fail due to cash flow issues. While some dispute the exact numbers, the underlying issue can't be. Cash flow is important. Period.
One would think that one of the most important business areas would be well understood. That isn't the case though. Cash flow is still one of the most ill-understood topics within the small business community. And forecasting cash flow? Even though it is just as important, it is even more misunderstood.
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In this post we will shine light on these misunderstandings, talking about what cash flow is, what cash flow forecasting is, the different types of cash flow forecasting there are, and how forecasting your cash flow can greatly benefit your small business whether you're a founder of a startup or a web3 company, or a professional that has ventured out on their own (say a veterinarian, dentist, chiropractor, optometrist or lawyer).
So, let's start with the basics: what is cash flow?
Cash flow is simply the movement of money in and out of your business. Money coming in is called inflow, while money going out is called outflow. Your business' cash flows can be positive (more cash inflows than outflows), negative (more cash outflows than inflows), or neutral (equal cash inflows and cash outflows).
The movement of money within, and through, any business is extremely important. At a basic level, every entrepreneur sets out to make money. So stripping everything down, each business' ability to generate positive cash flow, consistently over time, determines just how good that business is performing.
The more cash flow a business can make, the better it is doing.
Now, the above discussion on the importance of cash flow might seem overly simplified, and it is, but most small business owners don't have a great handle on this basic construct.
And there are two reasons for this:
Double entry accounting underpins all accounting as we know it. It requires that every financial transaction to be recorded in at least two different accounts. For example, when you make a sale, you would record this transaction both in your sales account on your income statement and your cash account on your balance sheet.
While this system provides greater accuracy and transparency around business finances, it also makes measuring cash flow more difficult. And that's because changes in cash can occur in two places: your income statement or your balance sheet.
Examples:
There are two basic methods of accounting: cash accounting and accrual accounting.
Cash accounting only records transactions when the actual cash changes hands. So if you make a sale and the customer pays later, you wouldn't record that transaction until you collect payment from the customer.
Accrual accounting records income and expenses as they are earned or incurred, regardless of when any actual cash is received or paid out. Using our same example, if you make a sale and the customer pays later, accrual accounting would record the sale right away and create an accounts receivable. It would then eliminate that receivable and increase your cash balance when you collected payment.
Accrual accounting is a double edged sword. It creates financial statements that are more accurate and reliable for various users, but also creates timing differences, estimates and other complexities that aren't necessarily well understood by business owners.
Examples:
The cash flow statement is the report that helps overcome the shortcomings that accrual accounting and double entry accounting processes make. This report ties the balance sheet and income statement together within your typical financial reporting. It measures all cash inflows, all cash outflows and eliminates any non-cash estimates that are also contained within your financials. And ultimately it reconciles all of this information to the cash balance contained within all of your bank accounts.
You can see two different forms of cash flow statements: those using the direct method and those using the indirect method.
Cash flow statements using the direct method are considered by some to be more accurate. This method reports all cash inflows and cash outflows from your business operations separately from any other inflows or outflows. This could include things like customer payments, vendor payments, interest income, dividends and other operational items.
The indirect method is a bit more simplified. It adjusts your net income for any timing differences between when you record accrual based items and when the actual cash is paid or received. This reconciles your net income to your actual cash. While this method isn't as detailed as the direct method, it's also not as susceptible to error.
Regardless of the method used, cash flow statements are a very important piece of your financial picture. As mentioned previously, they show how cash moves through your business. That said, cash flow statements are historical in nature. They show you what your business did, but not where your business is going. To see that kind of information, you will want to use a cash flow forecast.
A cash flow forecast is a projection of all of your future cash flows. It is a best guess, based on all available information, of what you expect to happen in the future. This includes things like expected:
A good cash flow forecast will show you:
This will give you a clear picture of where your business is heading, and how much cash you will have on hand at any point in time.
We touched on some of the high level benefits of cash flow forecasting in our Definitive Guide To Managerial Accounting For Small Businesses. Simply put, knowing the future net cash flow of your business, and your estimated cash balance at any point in time gives you a lot of power as a business owner. You will be able to:
By forecasting cash flow, you can see when your business might have a shortfall of cash. This allows you to take steps to avoid or mitigate the effects of a cash shortage, such as delaying expenditures, extending payments on accounts payable or shoring up working capital with short term debt.
Cash flow forecasting will give you a better understanding of how money moves within your business allowing you to more effectively manage your activities with operating cash. This can be particularly helpful if your business:
Knowing when and how you will get paid, and how and when you will make payments will make you a lot less reliant on debt and lines of credit.
A cash flow forecast will give you a better understanding of your business's financial health. This information can then be used to make better informed decisions about how to best use your resources.
Do you have enough cash to buy the equipment you need to grow and hit your sales targets? Can you afford to hire that stellar employee you interviewed? If you open a new location how will that impact your bank account in the short and long term?
Whether you have negative cash flow or a host of cash surpluses, thinking through exactly how you will progress your business, and knowing the effects of these decisions is an extremely helpful exercise. It will surely boost your confidence.
A cash flow forecast will help you track your progress towards your strategic business and financial goals. The information gleaned from the cash flow forecasting process itself can be used to adjust your budgets and your business plans, making these documents dynamic and more relevant as your operations change.
There are a number of different types of cash flow forecasts. Just like cash flow statements there are different methods you can use to create a cash flow forecast. And depending on your goals, the time frame you use in your cash flow projection should change.
Similar to its cash flow statement counterpart, a direct forecasting shows the exact cash inflows and outflows that result from your business' operations. This is the more straightforward approach to cash flow forecasting as it directly ties to all incoming cash receipts and outgoing cash payments.
Indirect forecasting does not start with your business' operational cash inflow and cash outflows. Rather, it begins with your company's net income figure. From there, non-cash items and changes in working capital are added back into or deducted from the bottom line to get to a net cash flow figure.
Indirect cash flow forecasting is more common associated with three way cash flow forecasting. This cash flow projection method forecasts your income statement, balance sheet and cash flow statement and ties them altogether. Hence the term three way forecasting.
Three way cash flow forecasting is sometimes viewed as the most robust way to cash flow forecast. It eliminates a lot of possibility for errors, especially when using a spreadsheet, and also presents bank ready financial statement projections that can be used for lending purposes. This method is typically a lot more customized however, can take a lot more time to create and maintain, and sometimes isn't as easily understood by entrepreneurs.
Long term cash flow projections are typically forecast from one year to five years out, with most going to three years in range. This type of cash flow forecast is most often associated with strategic planning and indirect/three way cash flow forecasts. These types of estimates are often used to:
A short term cash flow forecast is much more operational in nature. It can range from days to months in terms of time frame, and often does not go beyond a year. This type of forecast is much more granular in nature, and has much more accurate information in terms of timing. It is often updated quite frequently, as regular as weekly forecasts or daily, and is ultimately used to answer the question "do I have enough cash to do X?" in the near term.
The biggest difference between a short term and long term cash flow forecast is its use. Long term forecasts are more strategic, while short term forecasts are more operational.
The best analogy is a road trip using a map. A long term cash flow forecast determines exactly where you are going and loosely determines how you will get there. A short term cash flow forecast is used while you are driving to that destination, constantly shifting due to traffic, construction and road closures.
It is often a best practice to use both a long term strategic and a short term operational cash flow forecast.
An accurate cash flow forecast can be a game changer. Whether you're a professional, such as a veterinarian, dentist, chiropractor, optometrist or lawyer, or a founder of a startup or a web3 company, you will experience cash flow issues. Studies show that the vast majority of business owners have at least once in their lives.
Knowing exactly when that cash flow issue will come, and what you are able to do to mitigate the problem is a definite advantage. One that will let you sleep a whole lot better at night. And that's exactly why cash flow forecasting is a must-have tool.
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Knowing exactly where your business cash flow is headed will let you sleep a whole lot better at night. And that's exactly why cash flow forecasts are a must have tool for every small business.
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