Business Planning -- A Roadmap for Success
Farm Business Management Update, August 1997
By Troy D. Wilson and David M. Kohl of the Department of Agricultural and Applied Economics, Virginia Tech
What is a Business Plan?
A business plan is a document outlining the key functional areas of a business including operations, management, finance, and marketing. Simply put, a business plan is a roadmap for a business. The traditional business plan is a paper document, although the emergence of electronic media has made paper an option. The depth of detail that a business plan contains will vary depending on the scope of the business and the purpose for which the plan is being prepared. A non-traditional business trying to obtain venture capital will have a much more detailed plan than a more conventional business trying to obtain a small bank loan. Almost all business plans have parts in common, which will be discussed later.
|"A good business plan can take anywhere from 50 to 100 hours to prepare. This sounds like a lot of time, but not when you are making a five or six figure investment."|
Why prepare a business plan?
Business plans may be prepared for many different reasons including new business start-ups, major changes in existing businesses, or simply to maintain the strategic direction of an ongoing business. Business plans can be used both internally for management purposes, as well as externally to attract investors, obtain financing from creditors, or recruit quality partners or employees. Business plans provide the entrepreneur with a means of evaluating the feasibility of a proposed venture and may uncover previously unconsidered opportunities or limitations. Business plans should evaluate, not promote. Business planning helps take the emotion out of decisions and focuses attention on reality. Business plans may be customized depending on the target audience -- investors, creditors, the board of directors, or some other group.
|"Those who prepare a business plan are 10 to 20 times more profitable, according to anecdotal evidence."|
Who should prepare the plan?
There is often a question about who should prepare the business plan. Should it be done internally or should someone be hired to do it? Although there are professional consultants who specialize in developing business plans, it is the business owner who will be the one to implement the plan. People are not investing in the consultant, they are investing in the business. At the very least, there should be input from every level of the organization. If it is a family business, both spouses should have input as well as any other family members who have a stake in the business. If it is a large, corporate business, senior management should not have sole responsibility for creating the plan. Everyone from the CEO to the entry-level employee should have a voice. With the proliferation of computers has come a multitude of software programs for creating business plans. These programs are useful for providing a basic framework for the plan. However, their flexibility may be limited. Combining these programs along with individual creativity will make for a better plan.
|"The best way for a business plan to fail is to have the CEO and management team develop it."|
Do farms and agribusinesses need a business plan?
It is likely that only a small percentage of traditional farming operations have a business plan. For relatively small operations or those with a stable existence, a plan is probably not necessary. However, for larger producers or those in an expansion or transition mode, a business plan can be invaluable. It is important to point out that a financial plan is not a business plan, rather it is just a component of it. Many agricultural producers are turning to alternative crops, employing non-traditional practices, or implementing unproven technology. In these situations, a sound business plan is recommended.
Where can you get information to help in developing a business plan?
Sources such as the Cooperative Extension Service, Small Business Administration, and small business centers can provide general information on business planning as well as guidance on legal requirements such as permits, taxes, licenses, and other issues related to business operations. These organizations may also offer help in obtaining financing or finding investors. For information specific to a particular industry or market, there are numerous primary and secondary sources of data. Primary data would include market surveys, questionnaires, focus groups, or other data collected in-house. Primary data is the most specific to the business's needs, but is also the most difficult and costly to obtain. Secondary data is that obtained from an external source such as census data, magazines, journals, marketing research firms, or other publications. Financial data is available from sources such as Robert Morris Associates Annual Statement Studies. Perhaps the largest single source of secondary data available today is the Internet. A person would be hard pressed not to find some relevant information pertaining to his/her business interest after a small time searching the World Wide Web. One should use caution and evaluate the quality of any secondary data, regardless of where it was obtained.
What are the components of a business plan?
A business plan should be written from a third-person point-of-view. The length of the plan will vary, but most plans will fall between 10 and 50 pages, excluding appendices. The following components for the business plan are suggested only as a guide and are by no means set in concrete. The order and emphasis placed on each area will vary depending on the venture and purpose of the plan.
The cover of a business plan should clearly indicate the name of the business, contact information such as names of key people (principals), addresses, phone numbers, or e-mail addresses, and perhaps most importantly, the date of the plan because revisions are almost always necessary. A good practice is to number the copies of the business plan and keep track of to whom they are distributed. Many great ideas are stolen from the business plans of others.
An executive summary is a concise overview of the key aspects of the plan including the company's current status, major mission and objectives, products and services, marketing strategy, and financial projections. It should highlight the key elements for success such as breakeven sales or price or market share. The executive summary, which should be no longer than five pages and be written after the plan is complete, gives an interested party a quick overview of the plan. If the summary sparks interest, additional detail is available in the body of the plan. The executive summary should create enthusiasm about the venture by making clear the intentions of the business and the opportunities that exist for the products and services.
Table of Contents
A table of contents will help the reader quickly refer to individual sections of the business plan. The table of contents should include all headings and subheadings within the body of the text.
History and General Description
The history and general description of the existing or proposed company includes the experiences and qualifications of the principals, the reasons for starting the business or adding the new product, and the structure of the business. For an existing business, existing products and their success (or failure) and a discussion of why could be appropriate. This section is the place to include a description of the industry in general.
Mission or Vision Statement
A mission or vision statement states why the business exists. It should be general enough to be flexible, but rigid enough to give the business a strategic direction. The mission statement should be visible; that is, it should be known and recognized by everyone involved in the business. It should be less than fifty words and contain a reference to the business's purpose, the customer, the financial objective, and most importantly, the employees or internal customers. Like the entire business plan, development of the mission statement should include input from all levels in the organization, not just management.
Goals and Objectives
While the mission statement is broad and general, goals and objectives are quantifiable and specific. They should be divided into short and long-term goals. Goals and objectives may be related to sales, profits, efficiency, or may involve expansion or bringing another partner into the business. The goals and objectives should be realistic and obtainable. Some examples of short-term goals may be:
Key Planning Assumptions
Much of business planning is based on logical assumptions rather than hard facts. It is impossible to have data to support every aspect of a business plan. It is critical to outline the key planning assumptions from the start to help avoid bias because of the emotion involved in planning a business venture. Key planning assumptions may include trends in the marketplace or consumer behavior patterns. They may include the potential number of people in a market, an assumption about government policy, or the future of a particular technology. Be sure to document sources of key data as well as price, cost, and market assumptions.
|Document, document, document!|
|"If you can't communicate your plan over a napkin, it's probably too complex."|
Presenting the Plan
The culmination of a well-prepared business plan is the presentation of the plan. A primary consideration in the presentation is that the organization of the written document is not necessarily the best way to organize the presentation. Factors influencing the arrangement include the amount of time allocated for the presentation, the complexity of the plan, and whether the audience has had an opportunity to review the plan ahead of time. A formal presentation should not be made until an impartial party has reviewed and critiqued the plan. Another set of eyes can often find critical flaws and prevent an embarrassing moment. Perhaps the most critical consideration is presentation skills. Technical expertise and presentation skills are not always traits that are packaged together. If there is more than one presenter, carefully assess which individual should present each part of the plan.
The plan should be presented from the listener's point of view, not the entrepreneur's. Visuals are important to effectively communicate the plan, especially for very technical information. However, the visuals should not distract from the content of the presentation. They should be clear, type should be large, and only one idea communicated on each overhead. The presenters should be ready for questions relating to the following:
| " A business plan is an overview of your journey, not the destination."
"Failing to prepare is preparing to fail."