A Complete Guide to Developing an Effective Business Plan

 

By Omodiaogbe Samuel

March 23, 2024

Introduction

Business Plan is a written document that describes the business idea and all the relevant internal and external elements involved in launching the new venture. Ideally, it is a word picture of what the entrepreneurial dream is, why the dream can be economically viable, and how the dream will be realized. Whether you are just starting out and need startup investment or are looking to expand your business and raise capital, a business plan is necessary. Indeed, a business plan is not only essential if you want to get people to invest in your idea. But it helps you to articulate how you will manage all the important aspects of your business, from products/services to operations, human resources, and finances. The plan is essential for the inception, growth and overall success of the company. A well-articulated business plan, can be used as a management tool to track progress toward realization of the company’s goals and objectives.

A good business plan should provide clarity and direction for the team and helps attract potential investors by showcasing the viability and growth potential of the business. Also, a business plan can help to identify potential risks and provides a roadmap for mitigating them. A business plan doesn’t have to be complicated. However, the more complex your product or service, the more detailed is required. But the goal is to be concise enough to hold a reader’s attention to the end without unnecessary complexity. Also, bear in mind, a business plan isn’t static, but dynamic. If things change during the course of your business, you can update or adjust the plan to reflect the new reality. It’s also possible to draft a whole new plan if you realize that your original plan no longer works for your business. Ideally, there are a few key elements that make a good business plan. First, your plan should be clear and concise. It should be easy to read and understand, and should not be overly long or complex. Second, your plan should be realistic. It should set achievable goals and objectives, and should outline a clear path to achieving them. Finally, your plan should be flexible. It should be able to adapt to changes in the marketplace and in your business.

Components of a Business Plan

Business plans can take many forms and shapes. Basically, the following are different types of business plan: standard business plan, mini business plan, working plan, presentation plan, growth plan, feasibility plan, operations plan, strategic plan, internal plan, lean startup plan, and exit plan. They are all developed for different reasons and purposes. But our focus is on a standard business plan. A standard plan is usually presented to banks and potential investors as it provides a complete detail of the company. The standard business plan explains how you will manage all the important aspects of your business, from products or services to human resources, to marketing/sales, to operational plans, and to financial plan. Investors such as venture capitalist, angel investors, and lenders such as banks will typically require that you have a traditional business plan. They do this because they are risk-averse and want to evaluate your business based on a standardized template with lots of supporting detail. Essentially, the outline of a business plan should be prepared from three perspectives – first, the market; second, the investors; and finally, the company. A standard business plan is important because:

  • It helps determine the viability of the venture
  • A well-crafted business plan serves as a roadmap, providing clear direction for the business.
  • It serves as a blueprint to guide investors and lenders in making informed decisions
  • Writing the standard business plan forces the entrepreneur to think about all aspects of the venture.
  • A clear business plan articulates the vision founders, and helps them work assiduously to realize the vision
  • A business plan takes into consideration all stakeholders and how they could impact the business.
  • The business plan helps identify the important variables that will determine the success or failure of the firm.
  • The standard business plan is used as a selling document to outsiders
  • . Business plans can be used as benchmarks to monitor the company’s performance.
  • Business plans can identify potential risks and provide strategies to reduce them.

 

Below are the components of a standard business plan

  1. Executive Summary
  2. Company Description
  3. Description Product or Service
  4. The Opportunity
  5. Market/Competitive Analysis
  6. Organization and Leadership Team
  7. Marketing and Sales Plan
  8. Operational plan
  9. Financial Plan
  10. The appendix

Executive Summary

The executive summary is the first and one of the most important parts of a business plan. This summary provides an overview of the business plan as a whole and highlights what the plan will cover. It’s critical to write a good executive summary as it’s often the part that can make or break an opportunity. Investors and lenders typically examine the executive summary to decide whether they should look deeper into the business plan or walk away. Remember that people reading your business plan may not know anything at all about your business or what it takes to succeed in your industry. Therefore, the executive summary should be able to give the reader a vivid overview of what your company is all about. As a result, you must spend time on this summary, which should be able to tell the reader in just a couple of minutes what it is you want to do, how you want to do it, and why you want to do it that way. Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. Without grabbing their attention of the readers, your business plan, no matter how well researched may not stand out.  Ideally, it’s often best to write the executive summary last so that you have a complete understanding of your plan and can effectively summarize it.

Remember this is the very first part your reader is going to read, and so it needs to pack a punch! Use it to sell your dream, whilst also explaining everything about your business in a nutshell. It needs not to be more than 2 pages (depending on the size of the business plan) and only include key information that the reader needs to know straight away, such as:

  • Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and how the business will create a competitive advantage.
  • Financial features. Highlights the important financial points of the business including sales, profits, cash flows, and return on investment.
  • Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If it’s loan you require for initial capital, specify the source of collateral, and how you will repay the loan.
  • Current business position. Provide relevant information about the company, its legal status, when it was formed, the principal owners and key personnel.
  • Major achievements. Details any developments in the company that are essential to the success of the business. Major achievements may include items like patents, prototypes, location of a facility, or any crucial contracts that need to be in place for product development
  • Management team: Highlight how the skills of your leadership is strategic positioned to successfully execute the business plan

Company Description

A company description contains basic information about the business, including its main products and services, vision and mission statements, and anything else that makes the company unique.   Here, you need to begin with a brief history of the business and why you started it, or if it’s a startup then highlight where the idea came from. The mission and core values must be clear. Also, you need to stress a few things you think are vital to your business and that sets it apart from all other businesses. Essentially, this part of the business plan section provides a strategic overview of the business and describes how the company is organized, what products and services it offers/will offer, and goes into further detail on the business’ unique capabilities in serving its target markets. The business description gives you an opportunity to tell the reader a story of everything about your business and how you plan to run it successfully. As a result, you need to focus on where your business fits in the market. Discuss your competitive advantages and how you’re going to stand out from the crowd. When describing the industry, discuss the present outlook as well as future possibilities. Also, you need to include some research of your competitors here, what are their strengths and weaknesses. Give a vivid description of the structure of the company. In addition to structure, provide the legal framework of the business. Detail whether the business is a sole proprietorship, partnership, limited liability or a corporation. State who the principals are, and what they will bring to the business. You should also mention who you will sell to, how the product will be distributed, as well as the business support systems. Describe how you want to financially run the business including your break-even time, and eventually when you expect to be profitable. Lastly, finish off with a section discussing what your plans for the future are and how you are looking to develop and grow the business over the next 3 – 5 years.

The company description explains your company’s functions, the way it conducts operations and its goals. Specifically, the business description should highlight the following:

  • Your company’s legal structure
  • A short history of your company
  • A short overview of your company’s business operations
  • What problem you’re helping the customer to solve
  • A list of your company’s products, services, current customers and suppliers
  • An outline of your company’s growth and market impact
  • A review of short and long-term business goals
  • A summary of plans to generate profit

Description of Product or Service

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. Writing a good product description is crucial to help readers understand what the product does and what makes it unique. So, begin the section by explaining how the product or service will fulfill the target market’s needs. Include features and benefits, but don’t go too deep into technical specifications―shift those to the appendix. Only include all relevant information about your products and services. This includes how you plan to manufacture them, how long they can last, what needs they may meet and how much you project it might cost to create them. To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. Also, you need to indicate whether you will need to patent your product idea and/or whether a patent application is pending. You should also indicate other steps you’ve taken to protect intellectual property such as your business name, product names, logo, and branding identity. If you are manufacturing a product, include information about the materials you’ll need and your suppliers for those materials as well as the production process.

Essentially, the business plan should highlight how the product or service will address the need, what is unique about your offering and why it would be difficult to replicate. To do this, you should outline key differentiators, features and why the product or service is something that stands out in the market. Product/service detail should be written in a jargon-free style so that it is easy for others to understand.

Elements to incorporate under products and services include:

  • The impact of your company’s product or service in the market
  • The competitive advantage it has over similar products sold within your market
  • The life cycle of the product customers
  • Research and development efforts to improve the quality of products
  • Production requirements and process
  • Proprietary features and intellectual property protections
  • Quality assurance measures

 

The Opportunity

This section describes the problem your business solves or the need it fulfills. It should detail your target market and explain why your solution is uniquely positioned to address the problem. When it comes to the opportunity itself, a good business plan begins by focusing on two questions: Is the total market for the venture’s product or service large, rapidly growing, or both? Is the industry now, or can it become, structurally attractive?  Essentially, the first step for entrepreneurs is to make sure they are entering an industry that is large and/or growing, and one that’s structurally attractive. The second step is to make sure their business plan rigorously describes how they will win in the market. The opportunity section must also demonstrate and analyze how an opportunity can grow—how the new venture can expand its range of products or services, customer base, or geographic scope. Entrepreneurs and investors look for large or rapidly growing markets mainly because it is often easier to obtain a share of a growing market than to fight with entrenched competitors for a share of a mature or stagnant market. Also, investors always look for opportunities for value pricing—markets in which the costs to produce the product are low, but consumers will still pay a lot for it. No investor wants to invest in a company where margins are skinny. Therefore, a business plan must demonstrate that careful consideration has been given to the new venture’s pricing scheme.

To demonstrate the attractiveness of an opportunity, investors are looking for businesses in which the company can buy low, sell high, collect early, and pay late. The business plan needs to spell out how close to that ‘ideal world’ the company is expected to be. The following questions should also be addressed so that investors can understand the cash flow implications of the opportunity:

  • When does the business have to buy resources, such as supplies, raw materials, and people?
  • When does the business have to pay for them?
  • How long does it take to acquire a customer?
  • How long before the customer sends the business a cheque?
  • How much capital equipment is required to support a naira of sales?

Market/Competitive Analysis

Market Analysis

A market analysis is the part of your plan where you bring together all the information you know about your target market. Basically, it’s a thorough description of who your customers are and why you believe they need your offering. So, begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential. Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on addressable market. It’s important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is right.  Factors that could affect feasible market can be tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.

Essentially, a market analysis forces the entrepreneur to become deeply knowledgeable in all aspects of the market. Investors want to put their money into market-driven rather than technology-driven companies. The potential of your product’s markets, sales, and profit is far more important than its attractiveness or technical features. Therefore, you can make a convincing case for the existence of a good market by demonstrating user benefit, expressing customer’s interest, and documenting market claims. A realistic business plan needs to specify the number of potential customers, the size of their businesses, and which size is most appropriate to the offered products or services. Detailing market analysis demonstrates your expertise in the field as well as how you anticipate future changes. Therefore, you need to include these elements in the market analysis section:

  • A list of customer segments with demographic information
  • Description of your target market
  • List of all competitors with business analysis of each
  • A general description of the industry
  • Marketing data on your company’s products
  • Description of your target market
  • Overview of industry projection
  • Market shares of the major players

Competitive Analysis

Competition can make or break a business. Therefore, before entering the market, the entrepreneur need to evaluate the competitive intensity of the industry and determine how competitors operate―their offerings, market shares, costs, and profitability level. This will give the entrepreneur an idea of what it can do differently to have a competitive edge. Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. Essentially, the purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market. Then, you device strategies that will give you distinct advantage such as setting up barriers to entry, and/or taking advantage of the weaknesses of the competitors

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior.  Or maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage. As a result, a strong competitive research and analysis can help you identify exciting opportunities and safeguard against potential threats. It can also inform how you define your product strategy and address customer needs in a better way than competitors. Additionally, competitive analyses―which should be conducted periodically, can help you strategize by discovering potential opportunities or threats that could impact your industry.  As a matter of fact, a careful competitive analysis can help you determine whether to continue or back out of the business. It’s better to fail fast that to commit resources and time to a venture that has no prospect 

Competitor scorecard

To effectively understand the competitive landscape, create a competitor scorecard of your industry. It is a great framework to assess your competitors using a consistent set of scoring metrics. You decide which attributes you want to score. For example, you can assess organizational attributes, such as market awareness or ability to execute. Or you can rank product attributes, such as ease of use, unique features, and quality. Then you determine a weighted scoring approach so you can rank the relative importance of each attribute from the customer’s perspective

See example below:

Essentially, the competitive analysis enables you to:

  • Understand the relative strengths and weaknesses of the players in the industry
  • Identify the path to opportunities for increased competitive advantage
  • Help you to understand the competitive landscape
  • Contribute to defining your value proposition, particularly on how to differentiate
  • Enables you to capitalize on your strengths
  • Inform strategic planning

Organization and Management Team

This section of your business plan explores the details of your business’s management and organization strategy. Here you need to include information of the key people who are going to be involved in the business and how the management structure is going to work.  Having the right management team is more important to investors than simply the idea. A business plan that ignores or short-change this section is not going to fly. Investors want to see that you have the ability to overcome the inevitable challenges and that you have a team with the capacity to make right decisions in the face of challenges. So, they’re very much interested in this section of business plans to understand who is running the business and what unique qualifications they possess to make the company successful. As a result, you need to concretely express why your team is the right fit for your business by highlighting the past successful companies the team started or been a part of; specific experiments they led in other companies that were successful; their experience in a different industry and the value that would add to the team; their unique skill sets; the educational background; and the network asset they would add to the company

However, if it’s a startup with just a couple of you then that’s fine! Don’t be scared and pretend to be bigger than you are. Just be honest and explain exactly how the business is going to work. To that effect, you can include names and information of any external help you looking forward to outsourcing task with important skillset you might not have inhouse such as business development, accounting, technical, legal services etc. You can also include here your advisory team as a startup if you don’t have a board of directors. As a startup, don’t oblige yourself to define the management team using C-level titles like CEO, CMO, and CFO. While it’s tempting to have such positions, it may not be the most effective way to run a startup.

Specifically, here are details you should add to your organization and leadership team section:

  • An organization chart listing departments and employees
  • A description of the ownership shares and the involvement executives have in your company
  • A profile of the leadership team, job titles, primary responsibilities and previous experience
  • Additional names of board members, advisors and legal counsel
  • Highlights of relevant experiences of each key team member in the company.
  • List of external expertise you will outsource skillset you don’t have inhouse

 

Marketing and Sales Plan

This part of your business plan covers the specifics of how you plan to market and sell your products and services.

Marketing Plan

Marketing is a very important section as it defines how you are going to market your business to your customers and make money. You can have the greatest product in the world, but if no one knows you exist then it’s all for nothing. On this section, you need to highlight the following:

Positioning Statement: The best place to start with a marketing plan is with a positioning statement. Your positioning statement is a simple one to two sentence reason why your target market should choose your company instead of the competition. This statement makes it clear you have identified a core problem your company is built around. Also, that you understand your competitive advantage that makes you a better fit for this audience compared to your competitors. Essentially, you need to use the information from your competitive analysis to help you derive your positioning statement. Ideally, customers will compare your products to competitors’ and look for any unique factors. Therefore, your goal is to distinguish yours from the competition by giving associations that will stick to your brand. Examples of common positioning buzzwords are affordable, reliable, heavy-duty, safety, simple, etc.

Before a product can be positioned, you need to provide answers to these questions:

  • How are your competitors positioning themselves?
  • What specific attributes does your product have that your competitors don’t?
  • What customer needs does your product fulfill?

Pricing: After defining your product position in the market, you have to develop a pricing strategy and model. This is the part of the business plan where you explain how you will make money. What you intend to charge for your product and your pricing model help inform the health of your business plan.

Below are pricing methods:

  • Cost-plus pricing: Determine the cost in time and materials that it takes to deliver the product/service and add a percentage on top for profit. This assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
  • Market pricing. Look at what current businesses are charging for a similar service as part of your market analysis and base your price around this number.
  • Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product.
  • Value-based pricing: Here the price is determined by the value you’re offering to the potential customers
  • Freemium: You plan to give away your product for free. This is when you plan on making money by selling your customers attention (ads) or data. Or you give the basic product/service away for free and charge for premium service

Promotion: As an entrepreneur, there are many options to advertise your products and services. To determine which marketing channels you should use, look back at your customer profiles. Each demographic has its preferences, so make sure to consider them when picking a platform to advertise your business through. Next, create a marketing plan to convince your customers to buy your products. Although sales promotions are considered a short-term strategy and ineffective when building customer loyalty, they can still boost sales.

These are some sales promotion plans you can use:

  • Trial products – offer a free trial to let customers test your products. This method is prevalent among software companies.
  • Bundles – sell combined products as a package at a lower price compared to purchasing each separately.
  • Discounts – give a price reduction for repeat buyers or during a festive season.
  • Limited-time products – launch products that are only available for a short time. You use this sales strategy exploits the sense of urgency and scarcity to attract sales

Distribution: Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. A good way to make your decision is to analyze your competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide you with a strategic advantage. The distribution strategy you choose for your product will be based on several factors that include the channels being used by your competition, your pricing strategy and your own internal resources. As an entrepreneur, you can choose among the following or a combination of them to distribute your product or service: 

  • Direct sales: The most effective distribution channel is to sell directly to the end-user.
  • OEM (Original Equipment Manufacturer) sales: When your product is sold to the OEM, it is incorporated into their finished product and it is distributed to the end user.
  • Manufacturer’s representatives: One of the best ways to distribute a product, manufacturer’s reps, as they are known, are salespeople who operate out of agencies that handle an assortment of complementary products and divide their selling time among them.
  • Wholesale distributors: Using this channel, a manufacturer sells to a wholesaler, who in turn sells it to a retailer or other agent for further distribution through the channel until it reaches the end user.
  • Brokers: Third-party distributors who often buy directly from the distributor or wholesaler and sell to retailers or end users.
  • Retail distributors: Distributing a product through this channel is important if the end user of your product is the general consuming public.
  • Direct Mail: Selling to the end user using a direct mail campaign.

Sales Plan

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal. Sales channel is how you will deliver your product or service to the market so that customers can make purchases. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time.

You need to project revenue for five-year as that is what most investors would expect of you. Your sales forecast is the revenue you anticipate to earn over the period. This should be broken down by each core product or service category you offer. When developing the revenue model for the business plan, the equation used to project sales is fairly simple. It consists of the total number of customers and the average revenue from each customer. In the equation:

  • T represents the total number of people
  • A represents the average revenue per customer
  • S represents the sales projection.
  • The equation for projecting sales is: (T)(A) = S.

 Ideally, every segment of the target market that is treated differently must be accounted for. In order to determine any differences, the various strategies utilized in order to sell the product have to be considered. Those strategies include distribution, pricing and promotion

 

Operational plan

This part of your business plan describes how you plan to operate your company. It covers how you carry out daily activities, like production or service methods, inventory control, supply chain management, and facility maintenance. It also outlines the roles and responsibilities of the managing body, the various departments, and the company’s employees’ roles and responsibilities. Additionally, the operations plan highlights the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. As a matter of fact, the plan details the day-to-day activities and strategies that a business needs to follow in order to materialize its targets. Essentially, there are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.

Depending on how your business structure, the operations plan may include elements such as:

  • Sourcing and fulfillment: If you are purchasing products and services from suppliers include details about the process for obtaining these products and services and the supply chain.
  • Technology: What technology do you use to run your business? Technology could be a source of competitive advantage. That is because technology could enable you to provide the customer with better product at a lower cost
  • Distribution: Distribution is about getting the product you make into the hands of the consumer. (If you are a service-based business you can skip this section)

 The following are distribution methods you can use:

  • Retail distribution – you sell your product through established retail locations which can be physical or online
  • Direct distribution – the customer purchases the product directly from you and you will send it directly to the customer.
  • Manufacturer’s representatives: A salesperson typically working on commission who sells your product to established retailers and distributors.
  • Logistics: Detail each division and their assigned tasks, addressing how you’ll cover sales, finance, marketing, administration, stock control and quality control. You should describe the systems and procedures that will be involved in all aspects of production, from the customer’s initial payment through to transport and delivery, including detailed information on your suppliers.
  • Capital requirements: Here you discuss the company’s needs in terms of equipment, facilities, insurance, and personnel, before highlighting any potential limitations to production
  • Manpower requirements:  you need to highlight individuals’ roles and responsibilities for your operations, plus their relevant skills and experiences. You should also mention the financial contributions, salaries and company benefits of the member

 

Financial plan

A comprehensive financial plan is essential for any business. You need to include a detailed financial forecast outlining your revenue projections, expenses, and cash flow analysis. The financial plan draws out the current business strategies, future projections, and the total estimated worth of the firm. If you need funding for your business, this section also describes the sources and amounts for that funding. However, if your business has already been operating for some time, stakeholders will expect a detailed report of revenues and expenses. Tables are usually the best choice for this kind of financial summary, as they provide an unbiased view of the numbers and allow stakeholders to look up specific values. One of the key purposes of your business plan is to determine the amount of capital the firm needs. The financial plan does this along with assessing the proposed use of these funds (e.g., equipment, working capital, labor expenses, insurance costs, etc.) and the expected future earnings. A financial plan generally consists of the business projection for the first 12 months, followed by quarterly projection for the second year, and annual projections for the next three to five years. If the company is already up and running, this section should include the recent financial statements. As a result, a 5-year financial report is required to be included to show past performances.

A typical financial forecast in a business plan includes the following:

Sales Forecast

A sales forecast is a prediction of future sales revenue. Sales Forecasting is the process of estimating what your business’s sales are going to be in the future. Sale forecasting is an integral part of business management. Without a solid idea of what your future sales are going to be, you can’t manage your inventory or your cash flow or plan for growth. The purpose of sales forecasting is to provide information that you can use to make intelligent business decisions. For a startup, you do the sales forecast monthly for the first year, and quarterly the second year, and annually for the next five years. Sales forecasting for an established business is easier than sales forecasting for a new business. The established business already has a sales forecast baseline of past sales. A business’s sales revenues from the same month in a previous year, combined with knowledge of general economic and industry trends, work well for predicting a business’s sales in a particular future month. Essentially, you need date of sales forecast for your revenue projections on the income statement.

Expense Budget

One of the fundamentals of your financial plan and the start of good business management is managing expenses. Being right on budget is usually good, but good management takes the regular review to check on the timing, efficiency, and results of what your business spends. Along with the revenue forecast, you need to plan and manage spending. Revenue is money coming in, and spending is money going out. Expenses are spending on items like payroll and rent that aren’t part of direct costs and reduce profits, and taxable income. You need to understand that difference if you are going to run a business and manage cash flow. An expenditure budget helps businesses track purchases and limit operating costs to the lowest possible amount. Through careful planning and analysis, the entrepreneur can coordinate expenditures with tax strategies and cash flows. Without expenditure budgets, the entrepreneur run the risk of overspending and reducing or eliminating profit margins. As a startup, investors want to see if you’ve thought exactly how much you’re going to invest to keep the business running properly

Profit & Loss (Income Statement)

The income statement takes the numbers from the sales projection and puts them together, and subtracting the business expenses to arrive at the net income. For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year to the 5th year. The income statement should follow this order:

  • Income: Includes all the income generated by the business and its sources.
  • Cost of goods. Includes all the costs related to the sale of products in inventory.
  • Gross profit margin: The difference between revenue and cost of goods. Gross profit margin can be expressed in naira, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
  • Operating expenses: Includes all overhead and labor expenses associated with the operations of the business.
  • Total expenses: The sum of all overhead and labor expenses required to operate the business.
  • EBITDA (Earnings before interest, taxes, depreciation, and amortization): The difference between gross profit margin and total expenses, the net income depicts the business’s debt and capital capabilities.
  • Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
  • EBIT (Profit before interest and taxes): The difference between net profit and depreciation.
  • Interest expense: Includes all interest derived from debts, both short-term and long-term.
  • Profit before taxes: The difference between net profit before interest and interest.
  • Taxes: Includes all taxes on the business.
  • Profit after taxes (net income): The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.

Cash Flow

 The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. Like the income statement, the cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and yearly to the next 5 years

Items that should be included in the cash-flow statement and the order in which they should appear are as follows:

  • Cash sales: Income derived from sales paid for by cash.
  • Receivables: Income derived from the collection of receivables.
  • Other income: Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
  • Total income: The sum of total cash, cash sales, receivables, and other income.
  • Material/merchandise: The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
  • Production labor: The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
  • Overhead: All fixed and variable expenses required for the production of the product and the operations of the business.
  • Marketing/sales: All salaries, commissions, and other direct costs associated with the marketing and sales departments.
  • R&D (Research and Development): All the labor expenses required to support the research and development operations of the business.
  • G&A (General and Administration): All the labor expenses required to support the administrative functions of the business.
  • Taxes: All taxes, except payroll, paid to the appropriate government institutions.
  • Capital: The capital required to obtain any equipment elements that are needed for the generation of income.
  • Loan payment: The total of all payments made to reduce any long-term debts.
  • Total expenses: The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
  • Cash flow: The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
  • Cumulative cash flow: The difference between current cash flow and cash flow from the previous period.

Balance Sheet

Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan. However, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas assets, liabilities and equity. To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers.

The following are the components of a balance sheet:

Assets: Assets are divided into three categories, current, fixed, and other assets. Current assets are either cash or those items that can be converted to cash within one year like stocks, inventory and account receivables. Fixed assets are tangible like vehicles, machinery, property and furniture. Other assets don’t fit neatly above and might be life insurance cash value or long-term investment properties.

Liabilities: There are two types of liabilities, current and long-term. Current liabilities are debts due under one year and can include accrued payroll, short term lines of credit and taxes payable. Long-term liabilities are debt due greater than one year and can include bank debt and shareholder loans.

Owner’s equity: This is the share of assets that are allowed to pass to the owner(s) after liabilities are paid. (Assets-Liabilities = Owners’ equity)

Other Items

Use of Funds: If you are raising funds from investors, this section of the business plan will detail broadly how the money will be spent. Funds can be needed for working capital, geographical expansion, recruitment drives, building machinery or buildings, advertising, and so on. The use of funds can also be understood as cash outflow, since it is the money spent for various activities performed to achieve organizational goals. Here, you need to state the total funding required at the moment and whether the company has a plan to raise capital again sometime in the near future. It must specify if the company is looking for a short-term loan or an investment in exchange for an equity stake and/or board membership.

Exit Strategy: When investors evaluate a business plan, they consider not only whether to get in but also how and when to get out. Because small, fast-growing companies have little cash available for dividends, the main way investors can profit is from the sale of their holdings, either when the company goes public or is sold to another business. The professional investor wants to cash out with a large capital appreciation. Investors want to know that entrepreneurs have thought about how to comply with this desire. Make it clear. Do you expect to go public, sell the company, or buy the investors out in three to seven years?  You need to provide to the investors how and when they should cash out. However, if you are not seeking angel investors or venture capital then you can skip this part.

The Appendix

The Appendix contains supporting documents or additional information not included in the main body of the plan. You can also include exhibits and appendices to support the viability of your business plan and give investors a clear understanding of the research that backs your plan. Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data. However, remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section. Therefore, the appendix is an optional section of the business plan to include all contents that were too large or out of place to include in the body of the business plan.

Tips for a business plan appendix:

  • The appendix should supplement the business plan. Make sure your business plan can stand alone if someone never reads the appendix.
  • Make sure everything included in the appendix is relevant and is referenced within the body of the business plan.
  • If the appendix is really long or has a lot of different parts, consider adding a table of contents at the beginning.

The business plan appendix is a great place to include:

  • Financial documents like your income statement, profit and loss statement, and cash flow statement.
  • Legal documents including Intellectual property certificates or registrations
  • Photographs of product or service
  • Marketing materials
  • Key business contracts
  • Detailed CVs of the management team
  • Relevant legal documentation
  • Licenses obtained
  • Bank statements
  • Etc.

Importance of A Business Plan

A well-crafted business plan provides clarity and direction for your team and helps attract potential investors by showcasing the viability and growth potential of the business. Furthermore, it helps identify potential risks and provides a roadmap for mitigating them.

Therefore, a business plan can help you in the following ways:

  • Sets objectives and benchmarks: A well-written business plan helps a business set realistic objectives and assign stipulated time for the goals to be achieved. It can also help a company set benchmarks and Key Performance Indicators (KPIs) necessary to reach its goals.
  • Maximizes resource allocation: A good business plan helps to effectively organize and allocate scares resources. It can also help the business to measure the financial impact of the decisions
  • Enhances viability: A business plan greatly contributes towards turning concepts into reality. Though business plans vary from company to company, the blueprints of successful companies often serve as an excellent guide for nascent-stage start-ups and new entrepreneurs. It also helps existing firms to market, advertise, and promote new products and services into the market.
  • Aids in decision making: Running a business involves a lot of decision making. Therefore, a well-thought-out business plan provides an organization the ability to anticipate the future events, and therefore allows them to come up with solutions to the issues well in advance.
  • Fix past mistakes: When businesses create plans, they keep in mind the flaws and failures of the past. Such plans that reflect the lessons learnt from the past offers businesses an opportunity to avoid future pitfalls.
  • Attracts investors: Business plans can be invaluable tools for attracting investment. It gives investors an in-depth idea about the objectives, structure, and validity of a firm. It helps to secure their confidence and encourages them to invest.
  • Clarity of vision: A well-crafted business plan serves as a roadmap, providing clear direction for the business.

Conclusion

The business plan is the product of a strategic thinking or planning process. The strategic direction developed in the process can then be communicated in the form of a business plan. Having a business plan is crucial when planning to improve an already-established company or start a new one. It creates a roadmap for your operations and guidelines for the team. It can also help you attract potential investors. A well-developed business plan is a framework that describes what you aim to achieve and how to go about it. It helps you to clarify your ideas, identify potential problems with your business model, establish short and long-term goals and, over time, measure your company’s progress. As a result, a well-articulated business plan should have these take aways

  • A business plan is a document describing a company’s business activities and how it plans to achieve its goals.
  • Startup companies use business plans to get off the ground and attract outside investors.
  • For established companies, a business plan can help keep the executive team focused on and working toward the company’s short- and long-term objectives.
  • There is no single format that a business plan must follow, but there are certain key elements that should be included.
  • Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. Also, an established business that has decided to move in a new direction might create an entirely new business plan to reflect the new reality

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC), a Chartered Management Consultant (ChMC), and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading learners on Coursera and Edx with over 500 Certificates from top-ranked Universities, Business Schools, and Organizations.

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

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