What Do You Need In Order To Build a Business Plan?
- Credentials & Qualifications
- Financial Statements
- In Conclusion
Creating a business plan can mean different things to different people and in different industries. For example…
Do you want to build a business plan for yourself, as a way of organizing your thoughts and doing your homework?
Or do you need a business plan to show to investors or to seek an SBA loan?
What you need a business plan for makes a big difference. If you’re building plan for lenders or investors, you’ll need to take extra steps for proper formatting and flawless presentation. When building a plan for yourself and your team, you only need to keep the content organized for easy reference.
Either way, the point of a business plan is to put on paper your approach to making your business sustainable.
What is your business?
How will your business grow?
How long will it take to be profitable?
Your business plan should address each of these questions in detail. The goal of this article is to help you organize all parts to your business plan.
It is not important to think about format at this point. Many business plans are formatted perfectly, but a closer look at the contents show how poor the plan actually is.
So to create a great presentation, you should put more care into gathering what you need in order to build a great business plan first. Once you have a great plan, formatting your business plan will be simple.
For formatting guidance, here are some helpful suggestions to assist you in building a presentation for lenders and investors.
Credentials & Qualifications
Take some time to make sense of what qualifies you to run a business. Do you need a college degree? Not necessarily.
But if you seek to be an entrepreneur in a specific industry, you must feel that you have what it takes to succeed. In your plan, itemizing those qualifications is essential. That way, you can notice where you may lack experience and credentials, and you know what you need to do next.
If you have formal education, take some time to lay it out on paper. What was the degree and how does it relate to your business?
You should showcase any business and marketing degrees in your business plan. Even certifications (such as project management and Six Sigma) are great additions to your formal education.
If your industry requires certain licenses and certifications that you don't yet have, you can build a plan to qualify. Not only are these credentials critical from a legal standpoint, but any additional training can enhance your skills and experience.
Industry experience is often the best way to qualify for business ownership. Go through your resume and note all the different positions you held that "made you."
Leadership is also a valued quality in entrepreneurship. Anytime that you led a team to success is a great addition to this part of your plan.
Getting More Education and Experience
After taking stock of your qualifications, do you feel you need more education, experience, or both?
Don’t be discouraged. Think about you what you need to become a leader in your field. Consider talking to industry experts about what qualifications they had (or wish they had!) before launching their own business.
To be successful in business, you will need to master the process of seeing deficiencies and "closing the gap" in those deficiencies. Many aspiring entrepreneurs in this phase created a growth plan for themselves and stuck to it.
Whether your business is a product or service, you will need to explain how customers receive and use it. The customer problems that your business is solving are more important than your actual business idea!
Your product/service distribution (or supply chain) demonstrates how reliable and efficient your business solution is.
It's not uncommon for aspiring business owners to put their distribution plan on paper and find critical problems with their plan. If this happens to you, don't get discouraged. Your ability to troubleshoot your idea will only make you a stronger self-starter.
When it comes to building a team, consider every individual that contributes to your business idea. Your teammates should challenge you, be dependable, and add value to your plan.
The greatest challenge you will have in building a team is recognizing and eliminating mediocrity. As an entrepreneur, you will have to make key decisions about who is a good fit and how your team will communicate effectively towards the goal.
Business partners often start businesses together with little planning and few ground rules. Sooner or later, they discover the hard way that what’s left unsaid or unplanned often leads to unmet expectations, anger and frustration. Partners can clash over countless things, including conflicting work ethics and financial goals, roles in the business and leadership styles. – Wall Street Journal
Many experts view business partnerships as no less complex and difficult than building a healthy marriage. Who you go into business with could very well determine the success or failure of that business.
If you think you have a great business partner, set communication ground rules and establish legally-binding agreements.
Few people really know how to collaborate. Those that are masters learned how to collaborate after years of trial-and-error. Collaboration will sometimes feel like losing and often feels like compromise. If you and your partner are narrow in your perspectives, collaboration will be very challenging.
Make sure to ask yourself if you need a business partner. If so, why?
Common reasons for a business partner are expertise or funding.
If your reason for partnering with someone does not fall into one of those categories, you might be trying too hard to fulfill a social obligation. This is a major red flag.
For example, married couples often go into business together as partners simply because they feel socially committed to helping their spouse. If both of you are not 100% on board with the business vision and plan, you may be putting a business and a marriage in jeopardy.
The same is true between various family members and good friends. Be honest with yourself and others upfront so that you don't experience too much collateral damage later on.
Still, many great businesses are launched by great friends and married couples. But in each success story, business partners worked hard to establish ground rules and commit to the business idea for the long-term.
Great business partners are comfortable with legal contracts.
Enter the world of entrepreneurship with partners that understand the value of contracts. Write everything down and have attorneys help you formalize your agreements (especially if you are going into business with family and friends).
Great business ventures have clearly defined roles and processes, and their founders develop a thick skin.
If you plan to hire employees, consider how you will mentor them into each role you will need to fill. Consider what your expectations are of those to whom you will be delegating vital tasks.
Payroll employees are not going to take your business as seriously as you will. And why should they? You own the business. It will be your responsibility to create the right working environment for your team.
Discuss your payroll plans with a CPA so that you understand compliance and costs. Write a description for each role that you need to fill, as well as each role’s responsibilities.
With this information, you can create a hiring and onboarding process.
If you don’t want to worry about payroll expenses and taxes, you might prefer to work with independent contractors.
Use independent contractors to outsource tasks beyond your skillset. Also, your time is valuable, and it might be wiser to outsource rather than do it all yourself. Even if you feel that you can do it all, that doesn't mean that you should.
Contractors often work in part-time and/or temporary roles. They are flexible and (in most cases) highly professional.
While you don't have to worry about most of the problems involving payroll employees, you should still consult your CPA when bringing on independent contractors.
Define expectations on both sides. Make sure that you have an Independent Contractor Agreement that you and the individual fully understand and sign. It's important to remember that independent contractors are freelancer business owners. If you are uncomfortable with the idea of someone working for you while juggling other clients, you might have to hire payroll employees instead.
There are many businesses that are run solely by the owner. This is an owner-operator setup and is by far the most cost-effective.
If you feel that your business can be run top-to-bottom efficiently by yourself, then it's probably in your best interest to be an owner-operator. Doing so will be less complicated, and you will have the opportunity to hire an assistant when your business grows.
However, it will be impossible to scale your business using the owner-operator model. If you don’t have a plan, you will be forced to rush the hiring process while in survival mode. Rushing your hiring process opens you up to legal issues, poor training, and a disgruntled workforce.
As such, you should plan ahead for when you need help.
Create a plan that incorporates both payroll employees and independent contractors. You can keep the plan in your back pocket, even if you feel like you won't need help for a long time. When your business is ready to hire, you’ll be ready.
When creating financial statements, you should either know how to work with accounting software or have someone that can help you.
While creating and understanding financial statements can be challenging for some, it is the most important part of your business plan.
Build Your Break-Even Calculator
I recommend two spreadsheets for building your break-even:
Your 12-month business budget will help you identify all your fixed and variable costs.
Fixed costs are those costs that do not change month-to-month, such as rent and utilities.
Variable costs are costs that increase and decrease as sales increase and decrease (such as costs of good sold).
Once you’ve identified all your costs, you can use the information you gathered in the business budget to build your break-even calculator. The break-even calculator tells you how much you need to sell in order for your business to pay for itself.
Define a Price Structure
Now that you have a break-even calculator, you can experiment with different price points.
Pricing yourself too high could discourage customers, particularly if the value of your product or service doesn't seem to match your prices. You can establish a baseline by examining what your competitors are charging, as well as how the quality of their deliverables compares with yours.
Pricing yourself too low could cause customers to devalue your brand. You don't want to sell yourself short. Creating confidence in your product/service will quickly become apparent to your customers, especially if you embrace a process of ongoing improvement.
Pro Forma Statements
“Pro Forma” refers to a forecast. The three statements below help you forecast costs and sales over a 2-5 year period.
Knowing all your costs and creating a break-even analysis are the most critical steps in building your financials. The financial statements below expand upon the work you’ve already done.
If you're using accounting software like Quickbooks, you can craft your statement of cash flows more easily.
Statement of Cash Flows
Think of this statement as a picture of money coming in (sales) and money going out (costs). Any money left over is profit. A statement of cash flows demonstrates how profits will grow as money moves in and out of the business.
Most businesses need about 3-5 years to generate and sustain a profit.
This statement looks at a year snapshot. Consider creating a pro forma statement of cash flows for the first 3 years of the business at a minimum.
When projecting sales, create a worst-case and best-case scenario.
Since you’ve already started building a 12-month business budget, you can also use this spreadsheet to build your projected statement of cash flows. You’ve already itemized your costs, so you can simply add in your projected sales.
It will help you if you think of an income statement as a variation on your statement of cash flows. You’re not really adding new numbers, just displaying them differently.
Once again, if you have properly worked out your 12-month business budget, building this statement will be easy. Remember to project at least 3 years out. Also consider showing a worst-case and best-case scenario.
For some reason, entrepreneurs seem to get confused by this financial statement more than others. It doesn’t need to be that way.
A simple formula states that the business’s assets (total cash, equipment, etc.) should equal the value of owner equity (what you own) plus debts/liabilities (what you owe).
Assets = Owner Equity + Liabilities
If you do not plan to have any debts for the business, then your assets and equity are essentially the same thing. But if you do plan to borrow, it's important that you forecast your debt within your balance sheet.
If you do not need funding now, you might later. Funding is an entrepreneur’s number one obstacle.
There will be times when your sales lag behind your costs. Funding helps you stay in business without a hitch.
Also, there will be times when you are growing quickly and might lag behind in your ability to keep up with demand. Funding helps you add technology, systems, employees, and more to help you scale your business in a sustainable way.
As you consider your funding options, recognize that most lenders are itching to process your application and hit you with a credit inquiry. Resist all invitations to apply for loans until you’ve examined all your funding options and have a basic understanding of the world of business funding.
Allowing lenders to pre-approve you for funding is fine, as long as they do not hit you with a credit inquiry. Too many credit inquiries in a 6-month period can disqualify you from funding.
The Small Business Administration is a government agency that co-signs with small business owners for a loan.
SBA loans are extremely difficult to qualify for. Bare minimum requirements include a good credit score, exhaustive business plan, and cash up front. It is easier to get an SBA loan once you’ve been in business for 1-3 years.
That said, many startups stick with the process and are able to secure an SBA loan to launch their business.
Here is a breakdown of the Pros and Cons.
This is a business loan, not a personal loan.
Loan amounts can go as high as $5 million.
The process of getting an SBA loan is great preparation for becoming a business owner.
In spite of what banks tell you, most SBA loans take 6-9 months to fund.
Upfront cash requirements could negate the need for a loan altogether.
It’s a government agency; the red tape can be overwhelming.
If you own your home, the SBA will require it as collateral.
Unless you are working with the SBA, it is pretty much impossible to get a business loan if you are a startup. Most banks want to see you in business for a couple of years before they give you a business loan.
Business loans report to your business credit, not your personal credit. This insures that what you borrow for your business will never interfere with your ability to get personal loans for a car, home, or credit card.
Many entrepreneurs leverage their cash and personal credit to secure funding for their first 1-3 years in business.
In lending, there are secured loans and unsecured loans.
Secured loans require collateral. For example, entrepreneurs might leverage the equity in their home for a home equity line of credit.
Unsecured loans require no collateral and are based solely on personal credit. While credit cards are the most common unsecured loan, some banks will give you a personal installment loan (that is, a lump sum amount that you pay back monthly over so many years).
Secured loans frequently have better rates than unsecured (the banks naturally feel more at ease when there is collateral that they can collect if you default), but that is not always the case. You certainly risk less when using unsecured loans.
If you seek personal loans, lenders will not want to see a business plan. But your business plan is still important: if your business fails, your personal credit will "bite the dust."
Investor capital can be the most challenging type of funding. But if you have a great idea and you don’t mind rejection, investor capital might be the way to go.
Your business plan needs to be stellar. Dedicate yourself to market research and presentation skills. If your business idea is a product, have a prototype with some sales under your belt. This is your proof of concept.
Investors want to see financials. They want to see a business plan and presentation so tight that they can surmise in 5 minutes (or less) if the business idea works for them.
Know how much capital you need and focus on finding the right investor. You can get rejected a million times, but all it takes is one good investor to launch your business.
Currently, loan stacking is frowned upon due to fraudulent use of the underwriting system. However, smart entrepreneurs are leveraging loan stacking in healthy ways.
The fraudulent use of loan stacking occurs when a borrower applies for a large variety of personal loans in a short time frame. Lenders approve the loan unaware that the borrower has applied to other lenders at the same time. But the fraudulent user has no intention of paying back.
Smart entrepreneurs are instead approaching multiple loans strategically. Applying to multiple loans should not be done indiscriminately. The loan stacking process works beautifully for entrepreneurs that have a plan to pay back.
0% Interest Credit Cards
Targeting multiple 0% credit card offers can be extremely effective. The 0% interest typically lasts for 12-18 months and does not require interest backpay once the interest-free period is over.
If you received 0% offers from reputable banks in the mail, you’ve likely been prescreened for an easy approval.
It is really important to stack 0% interest credit cards with the help of an unsecured lending specialist. Many of the best offers are not available in a simple Google search. Also, multiple bank underwriting systems can interfere if you did not apply to the right lenders in the right order.
No Pre-Payment Penalties
If you choose to loan stack for the purpose of paying back, make sure that the lenders you seek have no prepayment penalties. This ensures that you are able to save money in interest by paying off individual loans in full once the business is cash positive.
A Short Term Solution
Loan stacking for the purpose of paying back can be a fantastic short-term solution for your startup. Credit card lenders are frequently willing to negotiate terms with you once you’ve demonstrated reliable payback over a 12-month period.
If you’ve made all payments to lenders on time, your credit will get very strong in the long run. However, recognize that loan stacking does initially impact your credit with a large number of new accounts and credit inquiries.
If you plan to loan stack, work with an expert, and have a plan to seek strictly business financing once you have 2 years of business cash flow to show. Many smart entrepreneurs carefully leverage loan stacking and then secure an SBA loan to consolidate their debt in year 2 or 3.
Entrepreneurs in their 40s and beyond likely have a 401k account from a previous employer. Simply liquidating the retirement account means paying lots of taxes and eliminating your investments.
However, you can set up your business entity with its own retirement account. Your existing 401k can be rolled into your new retirement account.
After doing so, you can use the cash from your new retirement account to invest into your business. This rollover process is 100% legal and results in no tax payments on liquidated funds.
The rollover process results in an equity injection (cash dump) into your business without you losing your investment to the IRS or early liquidation fees.
Now you have what you need to build a powerful business plan. Whether for yourself, lenders, or investors, your business plan is the most effective way to calculate your risks as an entrepreneur.
Begin organizing the pieces into a sound presentation. And don’t be afraid to constantly improve your plan over time.