What Makes a Good Business Plan: Technical Aspects

There is a logic to a business plan, and that logic dictates the form that it will take. The plan must lay out what is important about the business, it must advocate for the success of the business, and it must do so with brevity and clarity. How long should an effective business plan be? What are the components of a successful business plan?

Bigger is not necessarily better

First things first, the plan should be no longer than forty pages, exclusive of detailed spreadsheets and appendixes. I know that sounds arbitrary, and it is. But consider that most courts, especially the more important courts of appeals and the United States Supreme Court, limit briefs to 40 to 50 pages. A 40-page document will take the better part of an hour for a fast reader to absorb, and no one--neither financier nor supreme court justice--is going to give you more time than that to make your pitch. My own experience after twenty years of reading and writing legal briefs and other advocacy documents is that if you can't convince me in 40 pages, you won't in 50, 60, or 100. Also, the arbitrary page limit imposes a certain discipline that forces you to edit and clarify your writing, which necessarily makes it better. Take it on faith if you must, but you exceed 40 pages at your peril.

On the other hand, it shouldn't be much shorter than 40 pages either. If you thoroughly discuss the matters that need to be in a plan, you should not have trouble filling 40 pages; if you do, there is something superficial about your business or your writing or both.

A little bit of this and a little bit of that

As to the contents of a plan, there is room for variation. However, by its nature the plan must have the following discussions clearly indicated:

An Executive Summary. This should be no longer than two pages. It may be the most important part of the plan, because it may be the only part that is actually read. If the executive summary does not capture the reader's interest, then he will probably not carefully consider or even bother reading the rest. In the executive summary, you must put the entire plan in a nutshell, so the reader grasps in quick strokes what this business is about. It provides a framework around which the rest of the plan builds. Drafting a good executive summary is hard work. It is usually the first part of the plan that is written, but the last part that is edited, for any changes in the other sections of the plan usually will call for an amendment to the executive summary.

A description of the product or service. What does your product or service do, how does it help anyone, why would anyone buy it? In this section you must also demonstrate that your product or service is producible, that it does not depend on untested technology or is not so expensive to produce that it cannot be priced competitively.

A description of the market. This section often precedes the product description. The point is that, just as a tree falling in a forest makes no sound if no one is there to hear it, a product, no matter how great, is a failure if no one is there to buy it. Accordingly, the product and the market go hand in glove, and must be considered together. Here is where you analyze the potential buyers of your product. Sophisticated business planners will have already conducted market testing with prototypes of the product, or will have commissioned professional market surveys to document that there will be a demand for the product and the extent of that demand. A measurement of the demand for your product is essential in developing projections.

An analysis of the Competition. This is really another aspect of your market description. Whatever demand your product satisfies must usually be shared by other companies providing similar solutions. While you should maintain a healthy optimism about your product and its prospects, you must temper that optimism with a realistic assessment of how you stack up against your competitors. If you don't, your plan will quickly lose credibility.

Your marketing plan. How, exactly, do you hope to bring the product you have described to the attention of the market you have defined in a way that maximizes your chances to succeed against the competitors you have identified? Different marketing strategies exist for different products, and you must know which are best for your product. You must also identify the various distribution channels that may be available for your product, and how you will make use of them.

Your capital needs. How much do you need in order to get your show on the road. Consider start-up expenses and operating expenses. Consider how much of your operating expenses are fixed and how much are variable with your revenues. Consider how much time it will take you to turn profitable. Remember that most businesses fail because they do not have enough capital to see them through to profitability, and that you probably will not be profitable as soon as you think you will. If you anticipate needing more capital later on, describe the funding rounds you are planning.

The infamous projections. Projections never turn out right, but you still need them. If you have done all the work in quantifying your market and your expenses, building projection spreadsheets is more tedious than difficult. Basically you want to plot the business's revenues and expenses over the subsequent twelve months and three to five years. It's a job miraculously expedited by spreadsheet programs. You should generally present your results in three forms: An income sheet, a balance sheet, and a cash flow statement. Investors use projections for a variety of uses. One, and the most important I think, is to see how carefully the managers have analyzed the business's probable future finances, which sheds light to how carefully they have treated the rest of the plan. Another use--misuse most of the time--is to use the projections as a basis for predicting the value of the enterprise two, three or more years out. Since the projections themselves are not likely to hold up over time, the valuations are equally unlikely to materialize. The third use is to try to determine the business's need for investment capital. The projections tell how long the managers think it will take their business to become profitable and self-sustaining, and the cash reserves it needs to stay afloat until then. The projections can be summarized in the plan itself, but detailed spreadsheets should be provided in the appendix for those investors who want to crunch their own numbers.

Management biographies. Next to the Executive Summary, this is the most important section. Investors want to see managers who have experience running a business. If your business has already been operating for a while, so much the better. If not, you must either have business experience yourself, or you must put on your team someone who does. It is not likely that any serious investor will give money to an inexperienced management. The risks of failure, already large with a starting business, then increase exponentially.

The investment. In this section, you should describe what you are looking for and what you are giving in return.

Remember, that serious venture capitalists are looking for two things: a 35% to 60% compounded rate of return on their investment after inflation, and a plan that allows them to cash out in 24 to 60 months.

You can still get funding if your don't exactly meet these parameters, but it will be more difficult. However, you will get nowhere if you don't pay strict attention to the expectations of your audience, so plan your capital raise accordingly.

The plan should also include as appendices backup material such as market studies, product test results, detailed financial information, news articles about the industry or product, indeed whatever there may be to demonstrate that you are not just another loony inventor with a crackpot idea. There is no real page limit to the appendices, but don't put in material that doesn't clearly advance your cause.

A professional can be a big help in preparing the final version of the plan. Someone who can look at the plan without being distracted by preformed biases and ideas can make the difference between a passable effort and a truly compelling one. And don't underestimate the importance of having a really good writer edit the final copy. Many, many business plans are doomed because their authors are mediocre writers, whose maybe excellent ideas are hopelessly buried in confusing language, and whose written work reads like gobbledygook. If your writing skills are not top-notch, writing a business plan is not where you should practice them.

Putting together a crackerjack business plan does not guaranty that your business will be financed, but it is the entry ticket to serious consideration. In the next several articles, we will look at various aspects of the business plan in more detail.