Subsection of: Creating an Effective Business Plan
Adapted from content excerpted from the American Express® OPEN Small Business Network
- Do I need a business plan if I’m not seeking financing?
- How do investors read a business plan, and what do they look for?
- What steps should I expect a venture capital firm to take with my plan?
- How long should my business plan be?
- Should I hire someone to write my business plan for me?
- Should I use business plan software?
Do I need a business plan if I’m not seeking financing?
For your small business to succeed, you need to know where you’re going and how you’ll get there. Creating a business plan forces you to set goals, determine the resources you will need to carry out your plan, and foresee problems that might otherwise broadside you.
If your business plan is not being used to solicit funding you can create an informal plan that serves primarily as a planning tool and a device that will keep you on track. An informal plan can also be used to show to potential business associates and partners.
You can choose from the array of business plan elements presented on this site to create a business plan that suits your needs. For example, while management biographies are very important to venture capitalists, they are not critical to an informal plan. But a word of caution, be sure to make your business plan comprehensive enough that it will serve one of its most important functions, helping you to think through the development of your business ahead of time. The minimum any business plan, even an informal one, should include is: business description, target market, competition, positioning, customers, sales distribution and marketing, and a cash flow statement.
How do investors read a business plan, and what do they look for?
Don’t expect every person you will send your business plan to read it thoroughly. In fact, you really can only count on them to skim it. Investors know what they’re looking for in a plan – they want to see a business that will grow rapidly and someday return a handsome profit. Venture capital firms, for example, expect to receive an average of five times their original investment within 5 to 7 years.
Keep in mind that investors rarely put money into a “product” — they invest in a business. Many great products have floundered because the inventors did not understand how to get people to buy them. So be sure to show that you understand how to market your product or service.
Your executive summary will likely be the first thing read. Make it stand out by highlighting the unique nature of your product or service, the strength of your management team, and why your business will make money. If the executive summary grabs their interest, many potential investors will move to the rest of the plan. But they probably won’t read it in order. Some investors go straight to the description of the management team – they want to see if anyone involved with the company has had experience with successful start-ups, and has relevant experience in this industry. Others may go to the financials section to see when and how you plan to attain long-term profitability.
What steps should I expect a venture capital firm to take with my plan?
The average venture capital company receives several business plans every day. That translates into several hundred plans a year. They invest in only a handful – under 1%.
Expect your business plan to go first to a junior-level person, who will scan your plan, perhaps highlight some important parts, and, if you pass, send it on to a partner. Maybe one or two out of ten get this far. If it interests the partner, you will probably be called in for an interview, or the partners will go and visit your place of business. If there’s still sufficient interest (maybe one out of 100 of the original plans sent get this far), the partners at the firm will begin serious discussions and evaluations, and perhaps think about how to negotiate an investment. This is far from a guarantee of investment – most companies that reach this stage are subsequently turned down. If you pass this stage, you are on your way to securing investors.
How long should my business plan be?
30-50 pages should suffice. Anything longer than that and you risk alienating a potential investor, or you force them to skim through the document rather than read it. You won’t be impressing anyone by creating a 200-page document – what’s contained in the plan is much more important than how long it is. The more concise and readable you business plan is, the more focused your business will appear.
Focus on those details that tell your business’ story, that set you apart from your competition, that make your business appear to be a good financial investment, and that show you will be profitable.
In terms of style, make sure your plan looks professional, but not flashy. There’s no need to spend lots of time creating glitzy graphics and charts – just make sure that the ones you use tell your story and are easy to read and interpret. You also don’t need to use multiple fonts – one or two standard business-like fonts like Times or Helvetica will do the trick.
Should I hire someone to write my business plan for me?
It is essential that your business plan reflects your personality and your goals. As the small business owner, you need to decide what your business’ short and long-term goals are, and you need to make the planning decisions. You cannot leave these decisions up to a surrogate, whether it’s a business plan consultant, your lawyer or your accountant.
Moreover, creating your business plan is an extremely useful exercise for you to go through because it forces you to think about many issues small business owners would rather avoid – your industry, position in the market, competition, development and manufacturing capabilities, pricing, risks you may face, and ultimately your profitability. Taking the time to do this yourself will help you focus.
That’s not to say hiring a business plan writer is a bad idea. But if you do, make sure you are heavily involved in the process. The writer should spend time interviewing you to get your input and be familiar with your goals and personality. You need to be able to provide documentation for any statement you make in the plan and the finished document must reflect your goals – so don’t be afraid to request extensive editing and rewrites if necessary.
If you are not confident in your writing abilities, you might want to hire a business plan writer to rewrite your plan after you’ve taken a stab at a first draft.
Finally, have someone review your plan for grammar and typos before you send it out to investors. Ask a colleague, friend, or spouse to read your plan.
Should I use business plan software?
There are a wide variety of software programs on the market designed to help you prepare a successful business plan. These programs vary, but most include a dedicated word processor, a detailed outline, and some interactive tools which can serve as a starting point for creating a plan.
Much like using a consultant, don’t expect the software to write the plan for you. It is still up to you to make sure that the plan honestly reflects your business’ goals. Also, be on the lookout for software that will generate a plan in a “cookie cutter” approach. You don’t want your business plan to look just like someone else’s. It needs to stand out from the pack to get noticed.