Business Plans: How to Prepare an Effective One

Why a business plan is worth the effort

A well thought out business plan is a valuable tool whether you're launching a new company or seeking financing for an existing one. Beyond satisfying a lender, it gives you milestones to measure your own progress against, and the process of writing it surfaces questions you may not have thought through yet. This guide is meant as an introduction to preparing a plan, not a template with every detail filled in, since those specifics depend on your goals and the nature of your business. Professional guidance is worth bringing in for the actual preparation, particularly for the financial sections.

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Before you start writing

If you're starting a new business, begin by examining your own reasons for wanting to go into business. Common motivations include wanting to be your own boss, wanting financial independence, wanting creative freedom, or wanting to put your skills and knowledge to full use. None of these are wrong reasons, but naming yours honestly helps you build a plan around what actually matters to you.

From there, work out what business is genuinely right for you. What do you like to do with your time? What technical skills have you developed? What do others say you're good at? Will your family support the venture? How much time do you realistically have to commit? Do any of your hobbies or interests have market potential?

Next, identify the niche your business will fill: what you're interested in starting, what you'll actually sell, whether the idea is practical and fills a real need, who your competition is, and what advantage you have over existing firms. You'll also want to weigh whether to buy an existing business or start from scratch, and whether a franchise makes sense for the type of business you're considering.

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The pre-business checklist

Before drafting the plan itself, work through a short checklist: what skills and experience you bring, what legal structure you'll use, how your business records will be maintained, what insurance coverage you'll need, what equipment or supplies are required, how you'll compensate yourself, what financing you'll need, where the business will be located, and what you'll name it. Your answers become the blueprint for the plan, detailing how the business will actually be operated, managed, and capitalized.

A business plan is usually necessary to raise outside capital, but its value goes beyond that. It forces a critical, honest evaluation of whether the business will provide a return worth the time and money you're about to invest, and it gives you a benchmark to measure your actual results against in later years.

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What the plan should include

Whether you're starting a new business, seeking financing, analyzing a new market, or planning future growth, the following structure works as a starting outline, adapted to your specific business.

Introduction and mission statement. Describe the business and its goals in detail, discuss ownership, list the skills and experience you bring, and explain your advantages over the competition.

Products, services, and markets. Describe what you're selling, identify customer demand, explain what makes it unique, define your market and its size and location, and lay out how it will be advertised, marketed, and priced.

Financial management. Explain the source and amount of your initial equity capital, build a monthly operating budget for the first year, project your return on investment and monthly cash flow, provide projected income statements and balance sheets for two years, discuss your break-even point, explain your personal balance sheet and compensation method, note who will maintain your accounting records, and include "what if" scenarios for problems that might arise.

Operations. Explain how the business will be managed day to day, cover hiring and personnel procedures, address insurance and lease considerations, and account for the equipment and logistics needed to produce and deliver your product or service.

Concluding statement. Summarize your goals and objectives, and state your commitment to the business's success.

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Using the plan once it's written

Once your plan is drafted, review it with a friend or business associate before you rely on it. When you're comfortable with the content and structure, bring it to your banker for a real discussion. Treat the plan as a living document that should change as your business grows, not something you file away once it's done.

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