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How to Write a Financial Analysis

Know what to include in important section of business plan

Alyssa Gregory is an entrepreneur, writer, and marketer with 20 years of experience in the business world. She is the founder of the Small Business Bonfire, a community for entrepreneurs, and has authored more than 2,500 articles for The Balance and other popular small business websites.

Financial Analysis of a Business Plan

Assumptions, know the ground rules, use visuals, check your math.

The financial analysis section of a business plan should contain the data for financing your business for the present, what will be needed for future growth, and an estimation of your operating expenses.

The financial analysis section of your business plan may be the most challenging for you to complete on your own, but it also could be the deal-maker or deal-breaker when you are searching for funding.

Because of the structured, in-depth financial data required for this section, you should consult your accountant or other trusted and qualified financial professional before writing this section .

The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements:

• Balance sheet : Your assumed and anticipated business financials, including assets , liabilities, and equity.
• Cash-flow analysis : An overview of the cash you anticipate will be coming into your business based on sales forecasts, minus the anticipated cash expenses of running the business.
• Profit-and-loss analysis : Your income statement that subtracts the costs of the business from the earnings over a specific period of time, typically a quarter or a year.
• Break-even analysis : Demonstrates the point when the cost of doing business is fully covered by sales.
• Personnel-expense forecast : The expenses of your team, as outlined in a management summary section .

Completing a financial analysis section for a business that hasn't been started yet requires some assumptions. However, these aren't guesses. What you expect from the business needs to be based on detailed research and data.

Go back to the other sections of your business plan and write down any financial assumptions you made while drafting those sections. You then can use those assumptions in your financial analysis section. The most important factor is ensuring that the data in the financial analysis section is consistent with the assumptions made in other sections of your business plan.

There may be no section of your business plan where you need help as much as you do with your financial analysis section. The assumptions, forecasting, and specific numbers can be complicated and generally difficult to wrap your head around, especially if you don’t have a financial background. This financial information, though, is exactly the data your audience will be looking for.

You can avoid the stress and uncertainty by getting help from a qualified financial professional early in the process.

When it comes to the financial analysis of your business plan, have a basic idea of what each element should include, where the data comes from, and what the numbers mean. This stands even if you have help developing the financial analysis section because you will be the one left to explain and expand on the financial data in face-to-face situations.

GAAP (generally accepted accounting principles ), a collection of rules, procedures, and conventions that define accepted accounting practices should be followed throughout this section.

Use graphs and charts in the financial analysis section to illustrate the financial data , just as you should in other sections of your business plan that include extensive data, numbers, statistics, and trends. Put the most important visuals in the financial analysis, with the supporting graphics included in the Appendix.

A quick way to lose the attention of a potential investor is by having flawed calculations or numbers that are not backed up. Double and triple check all of your calculations and figures, and have a third-party do the same to ensure everything adds up.

You also should avoid including any figures that are not explained, backed up and otherwise researched extensively, especially when it comes to assumptions you've made. Use data from current and past markets and financial situations to substantiate your numbers.

11.4 The Business Plan

Learning objectives.

By the end of this section, you will be able to:

• Describe the different purposes of a business plan
• Describe and develop the components of a brief business plan
• Describe and develop the components of a full business plan

Unlike the brief or lean formats introduced so far, the business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, financial information, and a summary of the business. Investors nearly always request a formal business plan because it is an integral part of their evaluation of whether to invest in a company. Although nothing in business is permanent, a business plan typically has components that are more “set in stone” than a business model canvas , which is more commonly used as a first step in the planning process and throughout the early stages of a nascent business. A business plan is likely to describe the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal business plan would follow at later stages after various iterations to business model canvases. The business plan usually projects financial data over a three-year period and is typically required by banks or other investors to secure funding. The business plan is a roadmap for the company to follow over multiple years.

Some entrepreneurs prefer to use the canvas process instead of the business plan, whereas others use a shorter version of the business plan, submitting it to investors after several iterations. There are also entrepreneurs who use the business plan earlier in the entrepreneurial process, either preceding or concurrently with a canvas. For instance, Chris Guillebeau has a one-page business plan template in his book The $100 Startup . 48 His version is basically an extension of a napkin sketch without the detail of a full business plan. As you progress, you can also consider a brief business plan (about two pages)—if you want to support a rapid business launch—and/or a standard business plan.

As with many aspects of entrepreneurship, there are no clear hard and fast rules to achieving entrepreneurial success. You may encounter different people who want different things (canvas, summary, full business plan), and you also have flexibility in following whatever tool works best for you. Like the canvas, the various versions of the business plan are tools that will aid you in your entrepreneurial endeavor.

Business Plan Overview

Most business plans have several distinct sections ( Figure 11.16 ). The business plan can range from a few pages to twenty-five pages or more, depending on the purpose and the intended audience. For our discussion, we’ll describe a brief business plan and a standard business plan. If you are able to successfully design a business model canvas, then you will have the structure for developing a clear business plan that you can submit for financial consideration.

Both types of business plans aim at providing a picture and roadmap to follow from conception to creation. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept.

The full business plan is aimed at executing the vision concept, dealing with the proverbial devil in the details. Developing a full business plan will assist those of you who need a more detailed and structured roadmap, or those of you with little to no background in business. The business planning process includes the business model, a feasibility analysis, and a full business plan, which we will discuss later in this section. Next, we explore how a business plan can meet several different needs.

Purposes of a Business Plan

A business plan can serve many different purposes—some internal, others external. As we discussed previously, you can use a business plan as an internal early planning device, an extension of a napkin sketch, and as a follow-up to one of the canvas tools. A business plan can be an organizational roadmap , that is, an internal planning tool and working plan that you can apply to your business in order to reach your desired goals over the course of several years. The business plan should be written by the owners of the venture, since it forces a firsthand examination of the business operations and allows them to focus on areas that need improvement.

Refer to the business venture throughout the document. Generally speaking, a business plan should not be written in the first person.

A major external purpose for the business plan is as an investment tool that outlines financial projections, becoming a document designed to attract investors. In many instances, a business plan can complement a formal investor’s pitch. In this context, the business plan is a presentation plan, intended for an outside audience that may or may not be familiar with your industry, your business, and your competitors.

You can also use your business plan as a contingency plan by outlining some “what-if” scenarios and exploring how you might respond if these scenarios unfold. Pretty Young Professional launched in November 2010 as an online resource to guide an emerging generation of female leaders. The site focused on recent female college graduates and current students searching for professional roles and those in their first professional roles. It was founded by four friends who were coworkers at the global consultancy firm McKinsey. But after positions and equity were decided among them, fundamental differences of opinion about the direction of the business emerged between two factions, according to the cofounder and former CEO Kathryn Minshew . “I think, naively, we assumed that if we kicked the can down the road on some of those things, we’d be able to sort them out,” Minshew said. Minshew went on to found a different professional site, The Muse , and took much of the editorial team of Pretty Young Professional with her. 49 Whereas greater planning potentially could have prevented the early demise of Pretty Young Professional, a change in planning led to overnight success for Joshua Esnard and The Cut Buddy team. Esnard invented and patented the plastic hair template that he was selling online out of his Fort Lauderdale garage while working a full-time job at Broward College and running a side business. Esnard had hundreds of boxes of Cut Buddies sitting in his home when he changed his marketing plan to enlist companies specializing in making videos go viral. It worked so well that a promotional video for the product garnered 8 million views in hours. The Cut Buddy sold over 4,000 products in a few hours when Esnard only had hundreds remaining. Demand greatly exceeded his supply, so Esnard had to scramble to increase manufacturing and offered customers two-for-one deals to make up for delays. This led to selling 55,000 units, generating $700,000 in sales in 2017. 50 After appearing on Shark Tank and landing a deal with Daymond John that gave the “shark” a 20-percent equity stake in return for $300,000, The Cut Buddy has added new distribution channels to include retail sales along with online commerce. Changing one aspect of a business plan—the marketing plan—yielded success for The Cut Buddy.

Link to Learning

Watch this video of Cut Buddy’s founder, Joshua Esnard, telling his company’s story to learn more.

If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. This version is used to interest potential investors, employees, and other stakeholders, and will include a financial summary “box,” but it must have a disclaimer, and the founder/entrepreneur may need to have the people who receive it sign a nondisclosure agreement (NDA) . The full business plan is aimed at executing the vision concept, providing supporting details, and would be required by financial institutions and others as they formally become stakeholders in the venture. Both are aimed at providing a picture and roadmap to go from conception to creation.

Types of Business Plans

The brief business plan is similar to an extended executive summary from the full business plan. This concise document provides a broad overview of your entrepreneurial concept, your team members, how and why you will execute on your plans, and why you are the ones to do so. You can think of a brief business plan as a scene setter or—since we began this chapter with a film reference—as a trailer to the full movie. The brief business plan is the commercial equivalent to a trailer for Field of Dreams , whereas the full plan is the full-length movie equivalent.

Brief Business Plan or Executive Summary

As the name implies, the brief business plan or executive summary summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. The executive summary version of the business plan is your opportunity to broadly articulate the overall concept and vision of the company for yourself, for prospective investors, and for current and future employees.

A typical executive summary is generally no longer than a page, but because the brief business plan is essentially an extended executive summary, the executive summary section is vital. This is the “ask” to an investor. You should begin by clearly stating what you are asking for in the summary.

In the business concept phase, you’ll describe the business, its product, and its markets. Describe the customer segment it serves and why your company will hold a competitive advantage. This section may align roughly with the customer segments and value-proposition segments of a canvas.

Next, highlight the important financial features, including sales, profits, cash flows, and return on investment. Like the financial portion of a feasibility analysis, the financial analysis component of a business plan may typically include items like a twelve-month profit and loss projection, a three- or four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a breakeven calculation. You can explore a feasibility study and financial projections in more depth in the formal business plan. Here, you want to focus on the big picture of your numbers and what they mean.

The current business position section can furnish relevant information about you and your team members and the company at large. This is your opportunity to tell the story of how you formed the company, to describe its legal status (form of operation), and to list the principal players. In one part of the extended executive summary, you can cover your reasons for starting the business: Here is an opportunity to clearly define the needs you think you can meet and perhaps get into the pains and gains of customers. You also can provide a summary of the overall strategic direction in which you intend to take the company. Describe the company’s mission, vision, goals and objectives, overall business model, and value proposition.

Rice University’s Student Business Plan Competition, one of the largest and overall best-regarded graduate school business-plan competitions (see Telling Your Entrepreneurial Story and Pitching the Idea ), requires an executive summary of up to five pages to apply. 51 , 52 Its suggested sections are shown in Table 11.2 .

Are You Ready?

Create a brief business plan.

Fill out a canvas of your choosing for a well-known startup: Uber, Netflix, Dropbox, Etsy, Airbnb, Bird/Lime, Warby Parker, or any of the companies featured throughout this chapter or one of your choice. Then create a brief business plan for that business. See if you can find a version of the company’s actual executive summary, business plan, or canvas. Compare and contrast your vision with what the company has articulated.

• These companies are well established but is there a component of what you charted that you would advise the company to change to ensure future viability?
• Map out a contingency plan for a “what-if” scenario if one key aspect of the company or the environment it operates in were drastically is altered?

Full Business Plan

Even full business plans can vary in length, scale, and scope. Rice University sets a ten-page cap on business plans submitted for the full competition. The IndUS Entrepreneurs , one of the largest global networks of entrepreneurs, also holds business plan competitions for students through its Tie Young Entrepreneurs program. In contrast, business plans submitted for that competition can usually be up to twenty-five pages. These are just two examples. Some components may differ slightly; common elements are typically found in a formal business plan outline. The next section will provide sample components of a full business plan for a fictional business.

Executive Summary

The executive summary should provide an overview of your business with key points and issues. Because the summary is intended to summarize the entire document, it is most helpful to write this section last, even though it comes first in sequence. The writing in this section should be especially concise. Readers should be able to understand your needs and capabilities at first glance. The section should tell the reader what you want and your “ask” should be explicitly stated in the summary.

Describe your business, its product or service, and the intended customers. Explain what will be sold, who it will be sold to, and what competitive advantages the business has. Table 11.3 shows a sample executive summary for the fictional company La Vida Lola.

Business Description

This section describes the industry, your product, and the business and success factors. It should provide a current outlook as well as future trends and developments. You also should address your company’s mission, vision, goals, and objectives. Summarize your overall strategic direction, your reasons for starting the business, a description of your products and services, your business model, and your company’s value proposition. Consider including the Standard Industrial Classification/North American Industry Classification System (SIC/NAICS) code to specify the industry and insure correct identification. The industry extends beyond where the business is located and operates, and should include national and global dynamics. Table 11.4 shows a sample business description for La Vida Lola.

Industry Analysis and Market Strategies

Here you should define your market in terms of size, structure, growth prospects, trends, and sales potential. You’ll want to include your TAM and forecast the SAM . (Both these terms are discussed in Conducting a Feasibility Analysis .) This is a place to address market segmentation strategies by geography, customer attributes, or product orientation. Describe your positioning relative to your competitors’ in terms of pricing, distribution, promotion plan, and sales potential. Table 11.5 shows an example industry analysis and market strategy for La Vida Lola.

Competitive Analysis

The competitive analysis is a statement of the business strategy as it relates to the competition. You want to be able to identify who are your major competitors and assess what are their market shares, markets served, strategies employed, and expected response to entry? You likely want to conduct a classic SWOT analysis (Strengths Weaknesses Opportunities Threats) and complete a competitive-strength grid or competitive matrix. Outline your company’s competitive strengths relative to those of the competition in regard to product, distribution, pricing, promotion, and advertising. What are your company’s competitive advantages and their likely impacts on its success? The key is to construct it properly for the relevant features/benefits (by weight, according to customers) and how the startup compares to incumbents. The competitive matrix should show clearly how and why the startup has a clear (if not currently measurable) competitive advantage. Some common features in the example include price, benefits, quality, type of features, locations, and distribution/sales. Sample templates are shown in Figure 11.17 and Figure 11.18 . A competitive analysis helps you create a marketing strategy that will identify assets or skills that your competitors are lacking so you can plan to fill those gaps, giving you a distinct competitive advantage. When creating a competitor analysis, it is important to focus on the key features and elements that matter to customers, rather than focusing too heavily on the entrepreneur’s idea and desires.

Operations and Management Plan

In this section, outline how you will manage your company. Describe its organizational structure. Here you can address the form of ownership and, if warranted, include an organizational chart/structure. Highlight the backgrounds, experiences, qualifications, areas of expertise, and roles of members of the management team. This is also the place to mention any other stakeholders, such as a board of directors or advisory board(s), and their relevant relationship to the founder, experience and value to help make the venture successful, and professional service firms providing management support, such as accounting services and legal counsel.

Table 11.6 shows a sample operations and management plan for La Vida Lola.

Marketing Plan

Here you should outline and describe an effective overall marketing strategy for your venture, providing details regarding pricing, promotion, advertising, distribution, media usage, public relations, and a digital presence. Fully describe your sales management plan and the composition of your sales force, along with a comprehensive and detailed budget for the marketing plan. Table 11.7 shows a sample marketing plan for La Vida Lola.

Financial Plan

A financial plan seeks to forecast revenue and expenses; project a financial narrative; and estimate project costs, valuations, and cash flow projections. This section should present an accurate, realistic, and achievable financial plan for your venture (see Entrepreneurial Finance and Accounting for detailed discussions about conducting these projections). Include sales forecasts and income projections, pro forma financial statements ( Building the Entrepreneurial Dream Team , a breakeven analysis, and a capital budget. Identify your possible sources of financing (discussed in Conducting a Feasibility Analysis ). Figure 11.19 shows a template of cash-flow needs for La Vida Lola.

Entrepreneur In Action

Laughing man coffee.

Hugh Jackman ( Figure 11.20 ) may best be known for portraying a comic-book superhero who used his mutant abilities to protect the world from villains. But the Wolverine actor is also working to make the planet a better place for real, not through adamantium claws but through social entrepreneurship.

A love of java jolted Jackman into action in 2009, when he traveled to Ethiopia with a Christian humanitarian group to shoot a documentary about the impact of fair-trade certification on coffee growers there. He decided to launch a business and follow in the footsteps of the late Paul Newman, another famous actor turned philanthropist via food ventures.

Jackman launched Laughing Man Coffee two years later; he sold the line to Keurig in 2015. One Laughing Man Coffee café in New York continues to operate independently, investing its proceeds into charitable programs that support better housing, health, and educational initiatives within fair-trade farming communities. 55 Although the New York location is the only café, the coffee brand is still distributed, with Keurig donating an undisclosed portion of Laughing Man proceeds to those causes (whereas Jackman donates all his profits). The company initially donated its profits to World Vision, the Christian humanitarian group Jackman accompanied in 2009. In 2017, it created the Laughing Man Foundation to be more active with its money management and distribution.

• You be the entrepreneur. If you were Jackman, would you have sold the company to Keurig? Why or why not?
• Would you have started the Laughing Man Foundation?
• What else can Jackman do to aid fair-trade practices for coffee growers?

What Can You Do?

Textbooks for change.

Founded in 2014, Textbooks for Change uses a cross-compensation model, in which one customer segment pays for a product or service, and the profit from that revenue is used to provide the same product or service to another, underserved segment. Textbooks for Change partners with student organizations to collect used college textbooks, some of which are re-sold while others are donated to students in need at underserved universities across the globe. The organization has reused or recycled 250,000 textbooks, providing 220,000 students with access through seven campus partners in East Africa. This B-corp social enterprise tackles a problem and offers a solution that is directly relevant to college students like yourself. Have you observed a problem on your college campus or other campuses that is not being served properly? Could it result in a social enterprise?

Work It Out

Franchisee set out.

A franchisee of East Coast Wings, a chain with dozens of restaurants in the United States, has decided to part ways with the chain. The new store will feature the same basic sports-bar-and-restaurant concept and serve the same basic foods: chicken wings, burgers, sandwiches, and the like. The new restaurant can’t rely on the same distributors and suppliers. A new business plan is needed.

• What steps should the new restaurant take to create a new business plan?
• Should it attempt to serve the same customers? Why or why not?

This New York Times video, “An Unlikely Business Plan,” describes entrepreneurial resurgence in Detroit, Michigan.

• 48 Chris Guillebeau. The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future . New York: Crown Business/Random House, 2012.
• 49 Jonathan Chan. “What These 4 Startup Case Studies Can Teach You about Failure.” Foundr.com . July 12, 2015. https://foundr.com/4-startup-case-studies-failure/
• 50 Amy Feldman. “Inventor of the Cut Buddy Paid YouTubers to Spark Sales. He Wasn’t Ready for a Video to Go Viral.” Forbes. February 15, 2017. https://www.forbes.com/sites/forbestreptalks/2017/02/15/inventor-of-the-cut-buddy-paid-youtubers-to-spark-sales-he-wasnt-ready-for-a-video-to-go-viral/#3eb540ce798a
• 51 Jennifer Post. “National Business Plan Competitions for Entrepreneurs.” Business News Daily . August 30, 2018. https://www.businessnewsdaily.com/6902-business-plan-competitions-entrepreneurs.html
• 52 “Rice Business Plan Competition, Eligibility Criteria and How to Apply.” Rice Business Plan Competition . March 2020. https://rbpc.rice.edu/sites/g/files/bxs806/f/2020%20RBPC%20Eligibility%20Criteria%20and%20How%20to%20Apply_23Oct19.pdf
• 53 “Rice Business Plan Competition, Eligibility Criteria and How to Apply.” Rice Business Plan Competition. March 2020. https://rbpc.rice.edu/sites/g/files/bxs806/f/2020%20RBPC%20Eligibility%20Criteria%20and%20How%20to%20Apply_23Oct19.pdf; Based on 2019 RBPC Competition Rules and Format April 4–6, 2019. https://rbpc.rice.edu/sites/g/files/bxs806/f/2019-RBPC-Competition-Rules%20-Format.pdf
• 54 Foodstart. http://foodstart.com
• 55 “Hugh Jackman Journey to Starting a Social Enterprise Coffee Company.” Giving Compass. April 8, 2018. https://givingcompass.org/article/hugh-jackman-journey-to-starting-a-social-enterprise-coffee-company/

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The Ultimate Guide to FP&A: Financial Planning and Analysis Explained

In the fiercely competitive startup world, understanding your financial health is non-negotiable. But while maintaining your balance sheet is crucial, a deeper level of financial wisdom propels your company from mere survival to ultimate success. We present the ultimate guide to Financial Planning and Analysis (FP&A) – an essential yet less understood discipline that can turbo-charge your business’s economic drive. We’ll untangle its roots, show you why it’s important for your startup, and provide tips on mastering this financial specialty. So buckle up and let’s delve into the world of FP&A!

FP&A, or Financial Planning and Analysis, is a crucial function in finance that involves activities such as budgeting, forecasting, and financial analysis. It provides businesses with accurate insights and data-driven decision-making support, helping them plan effectively, assess financial health, predict the impact of decisions, identify new revenue opportunities, and align strategy with execution. By combining financial data, operational data, and external data in one place for analysis, FP&A professionals can provide valuable guidance to inform confident planning and drive business success.

Understanding FP&A

Financial Planning and Analysis (FP&A) is a crucial function in finance that involves budgeting, forecasting, and financial analysis. But what exactly does it entail?

At its core, FP&A is a set of planning, forecasting, budgeting, and analytical activities that support business decisions and financial health. FP&A professionals provide accurate, data-driven insights to inform confident planning and decision-making. This involves combining financial data, operational data, and external data in one place for analysis.

Let’s consider an example to illustrate this further. Imagine a company wants to expand into a new market. FP&A professionals would assess the financial feasibility of this expansion by analyzing historical financial data, market trends, potential costs and revenues, and analyzing various scenarios to determine the potential impact on the company’s overall financial health. They would then provide recommendations based on this analysis to guide strategic decision-making.

Modern FP&A solutions utilize cloud-based deployment for scalability, easy collaboration, and access from anywhere. They also incorporate AI and machine learning for analyzing large amounts of data and uncovering insights. Robotic process automation can automate repetitive tasks in FP&A.

So why is FP&A important? Well, it helps organizations effectively allocate resources, optimize performance, identify growth opportunities, minimize risks, and align strategy with execution. It provides decision-makers with the information they need to make informed choices for the betterment of the business.

Overall, understanding FP&A is essential for finance professionals who want to excel in their roles and contribute to their organization’s success. It requires a strong foundation in finance principles, intermediate accounting knowledge, an understanding of financial statements, and intermediate Excel skills.

Now that we have a clear understanding of what FP&A entails let’s explore different approaches to planning within FP&A – strategy-based vs. mission-based planning.

• According to a 2020 report by Dresner Advisory Services, companies with dedicated FP&A teams are 1.5 times more likely to be top performers in their respective industries.
• A study conducted by the Association for Financial Professionals (AFP) found that organizations leveraging FP&A practices have seen an average increase in revenue of 10-20%.
• As per a survey by CEB (now Gartner), companies demonstrating superior performance in FP&A spend 20% less time on data gathering and more on strategic planning and analysis activities.

Strategy-Based vs. Mission-Based Planning

Within the realm of Financial Planning and Analysis (FP&A), planning plays a pivotal role in shaping an organization’s future. Two common approaches to planning within FP&A are strategy-based planning and mission-based planning.

Strategy-based planning focuses on aligning financial plans and decisions with the overall strategic objectives of the organization. It involves setting goals that support the company’s strategic initiatives and then developing financial plans and forecasts accordingly. This approach ensures that financial decisions are directly tied to the desired outcomes outlined in the company’s strategic plan.

For instance, if a company’s strategic goal is to increase market share by launching new products, the FP&A team would develop plans and forecasts that allocate resources towards product development, marketing, and distribution strategies necessary for achieving that goal.

On the other hand, mission-based planning centers around fulfilling the organization’s mission and purpose. It involves setting goals that align with the core values and purpose of the company. Mission-based planning places importance on factors such as social impact, sustainability, or corporate social responsibility.

Both strategy-based and mission-based planning have their merits, depending on the organization’s priorities and values. While strategy-based planning focuses on driving growth and achieving specific targets aligned with long-term strategic objectives, mission-based planning emphasizes broader societal impacts and values beyond pure financial metrics.

It is important to note that these two approaches are not mutually exclusive but can be integrated into a comprehensive FP&A framework. By considering both strategic objectives and organizational values, finance professionals can contribute to the overall success of their organizations while ensuring responsible decision-making.

Now that we have explored the different approaches to planning within FP&A, we can appreciate how understanding these nuances plays a crucial role in an FP&A professional’s toolkit.

Key Roles in FP&A

Within the realm of Financial Planning and Analysis (FP&A), several key roles contribute to its effectiveness and success. These professionals possess unique skills that collectively enhance the organization’s decision-making processes and financial health. Let’s explore some of these essential roles:

1. FP&A Analysts: These individuals are the backbone of FP&A teams, responsible for data gathering, analysis, and reporting. They work closely with other departments to understand their financial needs and provide insights for informed decision-making.

2. Financial Planners: Financial planners play a crucial role in developing strategic financial plans for organizations. By considering factors such as revenue forecasts, expense management, and risk assessments, they ensure alignment between financial goals and overall business objectives.

3. Business Partners: Business partners collaborate with various stakeholders, including department heads, executives, and finance teams. They act as strategic advisors by interpreting financial data, identifying trends, and providing actionable recommendations to improve business performance.

4. FP&A Managers/Directors: These leaders oversee the entire FP&A function within an organization. They are responsible for managing the team’s activities, ensuring accuracy in financial analysis and forecasting, and providing high-level guidance to facilitate effective decision-making at all levels.

Now that we have a clear understanding of the key roles in FP&A, let’s explore one of the core components that these professionals deal with on a regular basis: building and analyzing financial models.

Building and Analyzing Financial Models

Financial models serve as powerful tools for organizations within the field of FP&A. They enable businesses to make informed decisions based on robust analysis of historical data, current market conditions, and projected outcomes. Building and analyzing these models require a comprehensive understanding of financial statements, as well as the ability to incorporate various variables into a cohesive framework.

These models are built using spreadsheet software like Microsoft Excel or specialized FP&A tools such as Anaplan. Various components come into play during the construction and analysis of financial models:

1. Assumptions: Financial models rely on assumptions about factors that impact a company’s financial performance, such as sales growth rates, cost structures, and market trends. These assumptions guide the forecasting process to create realistic scenarios.

2. Data Analysis: Building accurate financial models involves analyzing historical data and identifying key performance indicators (KPIs) relevant to the organization’s objectives. This analysis helps identify trends, relationships, and potential risks or opportunities.

For example, an FP&A analyst may analyze sales data to understand the impact of seasonality or marketing campaigns on revenue generation. This information can then be used to inform budgeting decisions and future forecasts.

3. Scenario Planning: Financial models allow users to test different scenarios by adjusting variables and assumptions. By creating multiple scenarios, organizations can evaluate the potential outcomes of different strategies and make more informed decisions.

4. Sensitivity Analysis: Sensitivity analysis involves determining the impact of changes in specific variables on the overall financial model. This analysis helps identify potential risks and assess their magnitude, allowing organizations to develop contingency plans accordingly.

Building and analyzing financial models within FP&A requires a combination of technical skills, business acumen, and attention to detail. Next, we will explore other core components involved in FP&A to gain a holistic understanding of this discipline.

Core Components of FP&A

To truly grasp the essence of Financial Planning and Analysis (FP&A), it is important to understand its core components. These components serve as the building blocks for effective financial planning and decision-making.

One of the primary components is financial data analysis . FP&A professionals gather and analyze financial data from various sources, including historical financial statements, operational data, and external market trends. By combining these disparate pieces of information, they can uncover valuable insights that inform strategic planning and forecasting.

For instance, imagine a company analyzing sales data from the past few years to identify seasonal trends, customer preferences, and potential growth opportunities. This analysis provides a foundation for developing accurate revenue projections in the future.

Another crucial component is budgeting and forecasting . FP&A professionals utilize different methodologies like predictive planning and driver-based planning to create comprehensive financial models that forecast future outcomes based on key drivers and variables. This proactive approach allows organizations to anticipate potential risks and take preemptive measures to mitigate them.

Now that we have explored the importance of analyzing financial data and creating accurate forecasts, let’s delve into another core aspect of FP&A: policies, procedures, and practices.

• Financial Planning and Analysis (FP&A) relies on key components such as financial data analysis, budgeting and forecasting, and policies, procedures, and practices. By analyzing financial data, FP&A professionals can uncover insights that inform strategic planning. Budgeting and forecasting methodologies help create accurate financial models that anticipate future outcomes. Furthermore, establishing robust policies and procedures ensures efficient and effective financial planning and decision-making processes.

Policies, Procedures, and Practices

Policies, procedures, and practices form the framework within which FP&A functions effectively. They provide structure and guidelines for financial planning activities while ensuring consistency and reliability in decision-making processes.

Financial policies outline the principles and rules that govern budgeting, forecasting, reporting, and analysis within an organization. These policies establish the standards for assessing performance metrics, allocating resources, managing capital expenditures, and evaluating investment opportunities.

For example, a company might have a policy that sets limits for how much debt it can take on based on its financial health indicators such as debt-to-equity ratio or interest coverage ratio. This helps maintain a sustainable capital structure and ensures prudent financial management.

Procedures detail the step-by-step processes for executing financial planning tasks. These procedures provide a standardized approach to collecting and analyzing data, creating budgets and forecasts, and monitoring performance. They enable consistency and accuracy in financial analysis across different departments and ensure that everyone follows the same methodology.

Imagine a retail company with multiple stores. To create accurate sales forecasts, they may have a procedure in place that requires each store manager to submit weekly sales reports by a specific deadline. This ensures timely data collection and enables more accurate forecasting.

Practices , on the other hand, are the day-to-day activities carried out by FP&A professionals to execute financial planning tasks. These practices involve utilizing technology tools, conducting analyses, collaborating with stakeholders, and providing insights to support decision-making.

It is important to note that while policies and procedures provide the framework, practices can vary between organizations based on their unique needs and goals. However, best practices often emerge within the FP&A field, which are widely accepted as effective approaches to financial planning.

For instance, utilizing cloud-based FP&A platforms for real-time data access and collaboration is becoming more common as it enhances efficiency and agility in the planning process. Similarly, leveraging advanced analytics techniques like predictive modeling or scenario planning can help uncover valuable insights and improve forecasting accuracy.

Now that we understand the core components of FP&A and how policies, procedures, and practices shape its implementation, let’s explore the modern tools that have revolutionized this field.

Modern Tools in FP&A Implementation

Over the past decade, the field of Financial Planning and Analysis (FP&A) has witnessed significant advancements with the emergence of modern tools designed to streamline and enhance its implementation. These tools leverage technology to automate manual tasks, improve data accuracy, and facilitate real-time decision-making. Let’s explore some of the prominent modern tools used in FP&A implementation.

One such tool is Cube , a powerful FP&A solution that eliminates manual work and provides real-time insights. It combines the flexibility of spreadsheets with the power of enterprise software, offering features like automated data consolidation, integrated financial modeling , and customizable dashboards. With Cube, companies can optimize their planning processes and gain a competitive edge through more accurate forecasting and strategic decision-making.

Another popular tool is Workday Adaptive Planning (formerly Adaptive Insights), which offers flexible and scalable financial planning and analytics solutions for large enterprises. Its cloud-based platform enables collaboration, scenario planning, predictive modeling, and variance analysis. The intuitive interface allows users to easily navigate through complex datasets and generate dynamic reports.

Anaplan is yet another tool that stands out in the world of FP&A. It provides enterprise-wide solutions for complex scenario planning, budgeting, forecasting, and performance management. Anaplan’s cloud-based platform allows organizations to create integrated models that connect various departments and business units. This promotes cross-functional collaboration and enables better decision-making based on holistic insights.

Beyond these three examples, there are several other notable tools available in the market catering to different needs within FP&A, including Planful for continuous planning with structured and dynamic capabilities, OneStream XF for unified financial consolidation and reporting, Prophix Software for financial process automation, Vena Solutions for integrated planning across departments, Oracle Hyperion Planning for enterprise performance management, BizNet Software for real-time reporting and analysis, and Hubble by insightsoftware for financial reporting and analytics.

These modern tools have revolutionized the way FP&A professionals operate, enabling them to be more efficient, accurate, and strategic in their financial planning and analysis activities. The benefits of adopting these tools are manifold.

Benefits and Application of FP&A Tools

The application of FP&A tools brings numerous advantages to organizations seeking to optimize their financial planning and decision-making processes. Let’s delve into some of the key benefits:

Improved Accuracy and Efficiency: FP&A tools automate time-consuming manual tasks like data entry, consolidation, and reporting, reducing the risk of errors and freeing up valuable time for analysis. This leads to increased accuracy in financial forecasts and reports, enabling finance teams to make more informed decisions.

Real-time Visibility: Modern FP&A tools provide real-time insights into critical financial data, allowing stakeholders to monitor performance metrics, identify trends, and respond promptly to changing business conditions. Dashboards and visualizations offer a comprehensive view of the organization’s financial health at any given moment.

Enhanced Collaboration: These tools facilitate collaboration among different departments and teams involved in the financial planning process. Cross-functional input helps align organizational goals, improves communication, and fosters a unified approach towards achieving desired outcomes.

The benefits mentioned above are just a glimpse into how FP&A tools can transform financial planning and analysis practices. By leveraging automation, advanced analytics, and real-time capabilities, organizations gain a competitive edge in today’s fast-paced business environment.

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About the author: Oran Yehiel

Oran Yehiel is the founder of Startup Geek, with an MBA specializing in financial management and a background in Deloitte. As a Certified Public Accountant and Digital Marketing Professional, he writes about venture capital, marketing, entrepreneurship, and more, bringing a wealth of experience to businesses seeking growth and success.

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Financial Statement Analysis: How It’s Done, by Statement Type

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

Key Takeaways

• Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value.
• Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement, which form the basis for financial statement analysis.
• Horizontal, vertical, and ratio analysis are three techniques that analysts use when analyzing financial statements.

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How to Analyze Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s activities. As such, they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis , vertical analysis , and ratio analysis . Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets ,  liabilities , and  shareholder equity . Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit . It then moves to operating profit , which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company . Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement as they progress toward potentially going public.

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance .

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.

Below is a breakdown of some of the most common ratio metrics:

• Balance sheet : This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
• Income statement : This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
• Cash flow : This includes cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) . These metrics may be shown on a per-share basis.
• Comprehensive : This includes return on assets (ROA) and return on equity (ROE) , along with DuPont analysis .

What are the advantages of financial statement analysis?

The main point of financial statement analysis is to evaluate a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.

What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the company has a higher gross profit margin than its competitors, this may indicate a positive sign for the company. At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.

Congressional Research Service. “ Cash Versus Accrual Basis of Accounting: An Introduction ,” Page 3 (Page 7 of PDF).

Internal Revenue Service. “ Publication 538 (01/2022), Accounting Periods and Methods: Methods You Can Use. ”

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6 Elements of a Successful Financial Plan for a Small Business

Table of Contents

Many small businesses lack a full financial plan, even though evidence shows that it is essential to the long-term success and growth of any business. 

For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without one. If you’re not sure how to get started, read on to learn the six key elements of a successful small business financial plan.

What is a business financial plan, and why is it important? 

A business financial plan is an overview of a business’s financial situation and a forward-looking projection for growth. A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan.

A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and monthly expenses and plan for taxes each year.

Importantly, a financial plan helps you focus on the long-term growth of your business. That way, you don’t get so caught up in the day-to-day activities that you lose sight of your goals. Focusing on the long-term vision helps you prioritize your financial resources. 

Financial plans should be created annually at the beginning of the fiscal year as a collaboration of finance, HR, sales and operations leaders.

The 6 components of a successful financial plan for business

1. sales forecasting.

You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business, and this knowledge is invaluable as you plan marketing initiatives and growth strategies . 

For instance, a seasonal business can aim to improve sales in the off-season to eventually become a year-round venture. Another business might become better prepared by understanding how upticks and downturns in business relate to factors such as the weather or the economy.

Sales forecasting is also the foundation for setting company growth goals. For instance, you could aim to improve your sales by 10 percent over each previous period.

2. Expense outlay

A full expense plan includes regular expenses, expected future expenses and associated expenses. Regular expenses are the current ongoing costs of your business, including operational costs such as rent, utilities and payroll. 

Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and the office holiday party. It’s a good idea to distinguish essential expenses from expenses that can be reduced or eliminated if needed.

Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. Generally, a part of the budget should also be allocated to unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.

Associated expenses are the estimated costs of various initiatives, such as acquiring and training new hires, opening a new store or expanding delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities. 

As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.

3. Statement of financial position (assets and liabilities)

Assets and liabilities are the foundation of your business’s balance sheet and the primary determinants of your business’s net worth. Tracking both allows you to maximize your business’s potential value. 

Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a more complete view of your business’s health than a profit-and-loss statement or a cash flow report. 

A profit-and-loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.

4. Cash flow projection

You should be able to predict your cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges. 

It can also help you identify a cash flow problem before it hurts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment .

A cash flow projection gives you a clear look at how much money is expected to be left at the end of each month so you can plan a possible expansion or other investments. It also helps you budget, such as by spending less one month for the anticipated cash needs of another month.

5. Break-even analysis

A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs versus profits of expansion or growth of your output. 

Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful. A break-even analysis is also the best way to determine your pricing.

In addition, a break-even analysis can tell you how many units you need to sell at various prices to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.

6. Operations plan

To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required for you to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain will aid you in making informed decisions for your business’s growth and efficiency.

It’s important to tightly control expenses, such as payroll or supply chain costs, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.

For this reason, it is imperative for a business owner to conduct due diligence and become knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider. 

Tips on writing a business financial plan

Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view for future growth or expansion. A financial plan helps the business’s leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead. 

A business financial plan is essential if a business owner is looking to sell their business, attract investors or enter a partnership with another business. Here are some tips for writing a business financial plan.

Review the previous year’s plan.

It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast were. That way, you can address any discrepancies or overlooked elements in next year’s plan.

Collaborate with other departments.

A business owner or other individual charged with creating the business financial plan should collaborate with the finance department, human resources department, sales team , operations leader, and those in charge of machinery, vehicles or other significant business tools. 

Each division should provide the necessary data about projections, value and expenses. All of these elements come together to create a comprehensive financial picture of the business.

Use available resources.

The Small Business Administration (SBA) and SCORE, the SBA’s nonprofit partner, are two excellent resources for learning about financial plans. Both can teach you the elements of a comprehensive plan and how best to work with the different departments in your business to collect the necessary information. Many websites, including business.com , and service providers, such as Intuit, offer advice on this matter. 

If you have questions or encounter challenges while creating your business financial plan, seek advice from your accountant or other small business owners in your network. Your city or state has a small business office that you can contact for help.

Several small business organizations offer free financial plan templates for small business owners. You can find templates for the financial plan components listed here via SCORE .

Business financial plan templates

Many business organizations offer free information that small business owners can use to create their financial plan. For example, the SBA’s Learning Platform offers a course on how to create a business plan. It also offers worksheets and templates to help you get started. You can seek additional help and more personalized service from your local office.

SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”) but has expanded to include business owners and executives from many industries. Advice is free and available online, and there are SBA district offices in every U.S. state. In addition to participating in group or at-home learning, you can be paired with a mentor for individualized help. 

SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource because it addresses different levels of experience and offers individualized help.

Other templates can be found in Microsoft Office’s template library, QuickBooks’ online resources, Shopify’s blog and other places. You can also ask your accountant for guidance, since many accountants provide financial planning services in addition to their usual tax services.

Diana Wertz contributed to the writing and research in this article.

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12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

• The name and location of your company
• Products and services offered by your company
• Mission and vision statements
• Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

• Business location
• The legal structure of your business
• Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

• The geographical location of your target market
• Needs of your target market and how your products and services can meet those needs
• Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

• Industry description and statistics
• Demographics and profile of target customers
• Marketing data for your products and services
• Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

• Your competitors' identified advantages in the market
• How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
• The standout qualities that distinguish you from other companies
• Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

• Information about how your company plans to carry out its operations.
• The base location from which your company intends to operate.
• The number of employees to be utilized and other information about your company's operations.
• Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

• Projected income statements
• Cash flow statements
• Balance sheets
• Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

• Legal documents
• Licenses and permits
• Credit histories
• Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

• The management team and other stakeholders resume
• Marketing research
• Permits and relevant legal documents
• Financial documents

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What Should Financial Components of a Business Plan Include?

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Business plans are generally about 15 pages and begin with an executive summary which are comprised of key bullet points. The body of a business plan states different stages of the planning process, like how a business will prepare for the future, allocate resources, focus on key goals, and prepare for problems and opportunities.

A pro forma statement is generally written before the business plan by an accountant or tax attorney. It outlines an assumption of startup costs, including the purchase of equipment and fixtures, employee wages and benefits, lease and utility costs, and insurance, license and permit expenses. In addition, it estimates earnings based on market research and market share for the first three to five years.

Cash Flow Statement

Cash flow statements show "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," according to Entrepreneur website. These figures in turn make up what is known as a profit and loss statement -- most commonly referred to as a P&L statement. P&L statements are generated on a monthly, quarterly or yearly business during a company's operation.

Break-Even Analysis

A break-even analysis is a composition of costs and sales revenue. Costs are broken down into two main categories: variable and fixed. Variable costs fluctuate from month to month and include but are not limited to inventory purchases, utility costs, operating expenses such as fuel, fixture and equipment purchases, and employee wages. Variable costs are twofold: direct and indirect. Direct costs are directly attributed to production, such as wages and raw materials. Indirect costs are not directly attributable; an example is maintenance of equipment.

Balance Sheet

The balance sheet outlines a business' assets, liabilities and equity. Assets are cash on hand, inventory, accounts receivable, and equipment and fixtures owned by the business. Liabilities are business loans, credit lines and accounts payable. Equity is the amount of worth a business obtains by amortizing loans and the worth of company issued shares or stock. The term balance is derived from the fact that assets must be equal or balanced to the company's liability and owner's equity.

Income Statement

According to Entrepreneur.com, an income statement is a scorecard on the financial performance of your business that reflects a balance between sales and expenses. An income statement is calculated by combining earnings, business expenses, capital, and inventory and raw material costs. Using these financial categories, an income statement will show a net profit or net loss, usually over a company's fiscal year.

• Entrepreneur: Elements of a Business Plan
• Growthink: Key Business Plan Components--Putting Together a Business Plan
• Hedge Fund Implosion: Financial Components of a Business Plan
• Business Plan Success: Parts of a Business Plan
• Bplans.com: What Is a Business Plan?

Owen Richason grew up working in his family's small contracting business. He later became an outplacement consultant, then a retail business consultant. Richason is a former personal finance and business writer for "Tampa Bay Business and Financier." He now writes for various publications, websites and blogs.

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5.1.5: The Business Plan

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Learning Objectives

By the end of this section, you will be able to:

• Describe the different purposes of a business plan
• Describe and develop the components of a brief business plan
• Describe and develop the components of a full business plan

Unlike the brief or lean formats introduced so far, the business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, financial information, and a summary of the business. Investors nearly always request a formal business plan because it is an integral part of their evaluation of whether to invest in a company. Although nothing in business is permanent, a business plan typically has components that are more “set in stone” than a business model canvas, which is more commonly used as a first step in the planning process and throughout the early stages of a nascent business. A business plan is likely to describe the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal business plan would follow at later stages after various iterations to business model canvases. The business plan usually projects financial data over a three-year period and is typically required by banks or other investors to secure funding. The business plan is a roadmap for the company to follow over multiple years.

Some entrepreneurs prefer to use the canvas process instead of the business plan, whereas others use a shorter version of the business plan, submitting it to investors after several iterations. There are also entrepreneurs who use the business plan earlier in the entrepreneurial process, either preceding or concurrently with a canvas. For instance, Chris Guillebeau has a one-page business plan template in his book The $100 Startup . His version is basically an extension of a napkin sketch, without the detail of a full business plan. As you progress, you can also consider a brief business plan (about two pages)—if you want to support a rapid business launch—and/or a standard business plan.

As with many aspects of entrepreneurship, there are no clear hard and fast rules to achieving entrepreneurial success. You may encounter different people who want different things (canvas, summary, full business plan), and you also have flexibility in following whatever tool works best for you. Like the canvas, the various versions of the business plan are tools that will aid you in your entrepreneurial endeavor.

Business Plan Overview

Most business plans have several distinct sections (Figure 5.1.5.1). The business plan can range from a few pages to twenty-five pages or more, depending on the purpose and the intended audience. For our discussion, we’ll describe a brief business plan and a standard business plan. If you are able to successfully design a business model canvas, then you will have the structure for developing a clear business plan that you can submit for financial consideration.

Both types of business plans aim at providing a picture and roadmap to follow from conception to creation. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept.

The full business plan is aimed at executing the vision concept, dealing with the proverbial devil in the details. Developing a full business plan will assist those of you who need a more detailed and structured roadmap, or those of you with little to no background in business. The business planning process includes the business model, a feasibility analysis, and a full business plan, which we will discuss later in this section. Next, we explore how a business plan can meet several different needs.

Purposes of a Business Plan

A business plan can serve many different purposes—some internal, others external. As we discussed previously, you can use a business plan as an internal early planning device, an extension of a napkin sketch, and as a follow-up to one of the canvas tools. A business plan can be an organizational roadmap, that is, an internal planning tool and working plan that you can apply to your business in order to reach your desired goals over the course of several years. The business plan should be written by the owners of the venture, since it forces a firsthand examination of the business operations and allows them to focus on areas that need improvement.

Refer to the business venture throughout the document. Generally speaking, a business plan should not be written in the first person.

A major external purpose for the business plan is as an investment tool that outlines financial projections, becoming a document designed to attract investors. In many instances, a business plan can complement a formal investor’s pitch. In this context, the business plan is a presentation plan, intended for an outside audience that may or may not be familiar with your industry, your business, and your competitors.

You can also use your business plan as a contingency plan by outlining some “what-if” scenarios and exploring how you might respond if these scenarios unfold. Pretty Young Professional launched in November 2010 as an online resource to guide an emerging generation of female leaders. The site focused on recent female college graduates and current students searching for professional roles and those in their first professional roles. It was founded by four friends who were coworkers at the global consultancy firm McKinsey. But after positions and equity were decided among them, fundamental differences of opinion about the direction of the business emerged between two factions, according to the co-founder and former CEO Kathryn Minshew. “I think, naively, we assumed that if we kicked the can down the road on some of those things, we’d be able to sort them out,” Minshew said. Minshew went on to found a different professional site, The Muse, and took much of the editorial team of Pretty Young Professional with her. Whereas greater planning potentially could have prevented the early demise of Pretty Young Professional, a change in planning led to overnight success for Joshua Esnard and The Cut Buddy team. Esnard invented and patented the plastic hair template that he was selling online out of his Fort Lauderdale garage while working a full-time job at Broward College and running a side business. Esnard had hundreds of boxes of Cut Buddies sitting in his home when he changed his marketing plan to enlist companies specializing in making videos go viral. It worked so well that a promotional video for the product garnered 8 million views in hours. The Cut Buddy sold over 4,000 products in a few hours when Esnard only had hundreds remaining. Demand greatly exceeded his supply, so Esnard had to scramble to increase manufacturing and offered customers two-for-one deals to make up for delays. This led to selling 55,000 units, generating $700,000 in sales in 2017. After appearing on Shark Tank and landing a deal with Daymond John that gave the “shark” a 20-percent equity stake in return for $300,000, The Cut Buddy has added new distribution channels to include retail sales along with online commerce. Changing one aspect of a business plan—the marketing plan—yielded success for The Cut Buddy.

LINK TO LEARNING

Watch this video of Cut Buddy’s founder, Joshua Esnard, telling his company’s story to learn more.

If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. This version is used to interest potential investors, employees, and other stakeholders, and will include a financial summary “box,” but it must have a disclaimer, and the founder/entrepreneur may need to have the people who receive it sign a nondisclosure agreement (NDA). The full business plan is aimed at executing the vision concept, providing supporting details, and would be required by financial institutions and others as they formally become stakeholders in the venture. Both are aimed at providing a picture and roadmap to go from conception to creation.

Types of Business Plans

The brief business plan is similar to an extended executive summary from the full business plan. This concise document provides a broad overview of your entrepreneurial concept, your team members, how and why you will execute on your plans, and why you are the ones to do so. You can think of a brief business plan as a scene setter or—since we began this chapter with a film reference—as a trailer to the full movie. The brief business plan is the commercial equivalent to a trailer for Field of Dreams , whereas the full plan is the full-length movie equivalent.

Brief Business Plan

As the name implies, the executive summary summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. The executive summary version of the business plan is your opportunity to broadly articulate the overall concept and vision of the company for yourself, for prospective investors, and for current and future employees.

A typical executive summary is generally no longer than a page, but because the brief business plan is essentially an extended executive summary, the executive summary section is vital. This is the “ask” to an investor. You should begin by clearly stating what you are asking for in the summary.

In the business concept phase, you’ll describe the business, its product, and its markets. Describe the customer segment it serves and why your company will hold a competitive advantage. This section may align roughly with the customer segments and value-proposition segments of a canvas.

Next, highlight the important financial features, including sales, profits, cash flows, and return on investment. Like the financial portion of a feasibility analysis, the financial analysis component of a business plan may typically include items like a twelve-month profit and loss projection, a three- or four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a breakeven calculation. You can explore a feasibility study and financial projections in more depth in the formal business plan. Here, you want to focus on the big picture of your numbers and what they mean.

The current business position section can furnish relevant information about you and your team members and the company at large. This is your opportunity to tell the story of how you formed the company, to describe its legal status (form of operation), and to list the principal players. In one part of the extended executive summary, you can cover your reasons for starting the business: Here is an opportunity to clearly define the needs you think you can meet and perhaps get into the pains and gains of customers. You also can provide a summary of the overall strategic direction in which you intend to take the company. Describe the company’s mission, vision, goals and objectives, overall business model, and value proposition.

Rice University’s Student Business Plan Competition, one of the largest and overall best-regarded graduate school business-plan competitions, requires an executive summary of up to five pages to apply. Its suggested sections are shown in Table 5.1.5.1.

ARE YOU READY?

Create a Brief Business Plan

Fill out a canvas of your choosing for a well-known startup: Uber, Netflix, Dropbox, Etsy, Airbnb, Bird/Lime, Warby Parker, or any of the companies featured throughout this chapter or one of your choice. Then create a brief business plan for that business. See if you can find a version of the company’s actual executive summary, business plan, or canvas. Compare and contrast your vision with what the company has articulated.

• These companies are well established but is there a component of what you charted that you would advise the company to change to ensure future viability?
• Map out a contingency plan for a “what-if” scenario if one key aspect of the company or the environment it operates in were drastically is altered?

Full Business Plan

Even full business plans can vary in length, scale, and scope. Rice University sets a ten-page cap on business plans submitted for the full competition. The IndUS Entrepreneurs, one of the largest global networks of entrepreneurs, also holds business plan competitions for students through its Tie Young Entrepreneurs program. In contrast, business plans submitted for that competition can usually be up to twenty-five pages. These are just two examples. Some components may differ slightly; common elements are typically found in a formal business plan outline. The next section will provide sample components of a full business plan for a fictional business.

Executive Summary

The executive summary should provide an overview of your business with key points and issues. Because the summary is intended to summarize the entire document, it is most helpful to write this section last, even though it comes first in sequence. The writing in this section should be especially concise. Readers should be able to understand your needs and capabilities at first glance. The section should tell the reader what you want and your “ask” should be explicitly stated in the summary.

Describe your business, its product or service, and the intended customers. Explain what will be sold, who it will be sold to, and what competitive advantages the business has. Table 5.1.5.2 shows a sample executive summary for the fictional company La Vida Lola.

Business Description

This section describes the industry, your product, and the business and success factors. It should provide a current outlook as well as future trends and developments. You also should address your company’s mission, vision, goals, and objectives. Summarize your overall strategic direction, your reasons for starting the business, a description of your products and services, your business model, and your company’s value proposition. Consider including the Standard Industrial Classification/North American Industry Classification System (SIC/NAICS) code to specify the industry and ensure correct identification. The industry extends beyond where the business is located and operates, and should include national and global dynamics. Table 5.1.5.3 shows a sample business description for La Vida Lola.

Industry Analysis and Market Strategies

Here you should define your market in terms of size, structure, growth prospects, trends, and sales potential. You’ll want to include your TAM and forecast the SAM. This is a place to address market segmentation strategies by geography, customer attributes, or product orientation. Describe your positioning relative to your competitors’ in terms of pricing, distribution, promotion plan, and sales potential. Table 5.1.5.4 shows an example industry analysis and market strategy for La Vida Lola.

Competitive Analysis

The competitive analysis is a statement of the business strategy as it relates to the competition. You want to be able to identify who are your major competitors and assess what are their market shares, markets served, strategies employed, and expected response to entry? You likely want to conduct a classic SWOT analysis (Strengths Weaknesses Opportunities Threats) and complete a competitive-strength grid or competitive matrix. Outline your company’s competitive strengths relative to those of the competition in regard to product, distribution, pricing, promotion, and advertising. What are your company’s competitive advantages and their likely impacts on its success? The key is to construct it properly for the relevant features/benefits (by weight, according to customers) and how the startup compares to incumbents. The competitive matrix should show clearly how and why the startup has a clear (if not currently measurable) competitive advantage. Some common features in the example include price, benefits, quality, type of features, locations, and distribution/sales. Sample templates are shown in Figure 5.1.5.2 and Figure 5.1.5.3. A competitive analysis helps you create a marketing strategy that will identify assets or skills that your competitors are lacking so you can plan to fill those gaps, giving you a distinct competitive advantage. When creating a competitor analysis, it is important to focus on the key features and elements that matter to customers, rather than focusing too heavily on the entrepreneur’s idea and desires.

Operations and Management Plan

In this section, outline how you will manage your company. Describe its organizational structure. Here you can address the form of ownership and, if warranted, include an organizational chart/structure. Highlight the backgrounds, experiences, qualifications, areas of expertise, and roles of members of the management team. This is also the place to mention any other stakeholders, such as a board of directors or advisory board(s), and their relevant relationship to the founder, experience and value to help make the venture successful, and professional service firms providing management support, such as accounting services and legal counsel.

Table 5.1.5.5 shows a sample operations and management plan for La Vida Lola.

Marketing Plan

Here you should outline and describe an effective overall marketing strategy for your venture, providing details regarding pricing, promotion, advertising, distribution, media usage, public relations, and a digital presence. Fully describe your sales management plan and the composition of your sales force, along with a comprehensive and detailed budget for the marketing plan. Table 5.1.5.6 shows a sample marketing plan for La Vida Lola.

Financial Plan

A financial plan seeks to forecast revenue and expenses; project a financial narrative; and estimate project costs, valuations, and cash flow projections. This section should present an accurate, realistic, and achievable financial plan for your venture. Include sales forecasts and income projections, pro forma financial statements, a breakeven analysis, and a capital budget. Identify your possible sources of financing. Figure 5.1.5.4 shows a template of cash-flow needs for La Vida Lola.

ENTREPRENEUR IN ACTION

Laughing Man Coffee

Hugh Jackman (Figure 5.1.5.5) may best be known for portraying a comic-book superhero who used his mutant abilities to protect the world from villains. But the Wolverine actor is also working to make the planet a better place for real, not through adamantium claws but through social entrepreneurship.

A love of java jolted Jackman into action in 2009, when he traveled to Ethiopia with a Christian humanitarian group to shoot a documentary about the impact of fair-trade certification on coffee growers there. He decided to launch a business and follow in the footsteps of the late Paul Newman, another famous actor turned philanthropist via food ventures.

Jackman launched Laughing Man Coffee two years later; he sold the line to Keurig in 2015. One Laughing Man Coffee café in New York continues to operate independently, investing its proceeds into charitable programs that support better housing, health, and educational initiatives within fair-trade farming communities. Although the New York location is the only café, the coffee brand is still distributed, with Keurig donating an undisclosed portion of Laughing Man proceeds to those causes (whereas Jackman donates all his profits). The company initially donated its profits to World Vision, the Christian humanitarian group Jackman accompanied in 2009. In 2017, it created the Laughing Man Foundation to be more active with its money management and distribution.

• You be the entrepreneur. If you were Jackman, would you have sold the company to Keurig? Why or why not?
• Would you have started the Laughing Man Foundation?
• What else can Jackman do to aid fair-trade practices for coffee growers?

WHAT CAN YOU DO?

Textbooks for Change

Founded in 2014, Textbooks for Change uses a cross-compensation model, in which one customer segment pays for a product or service, and the profit from that revenue is used to provide the same product or service to another, underserved segment. Textbooks for Change partners with student organizations to collect used college textbooks, some of which are re-sold while others are donated to students in need at underserved universities across the globe. The organization has reused or recycled 250,000 textbooks, providing 220,000 students with access through seven campus partners in East Africa. This B-corp social enterprise tackles a problem and offers a solution that is directly relevant to college students like yourself. Have you observed a problem on your college campus or other campuses that is not being served properly? Could it result in a social enterprise?

WORK IT OUT

Franchisee Set Out

A franchisee of East Coast Wings, a chain with dozens of restaurants in the United States, has decided to part ways with the chain. The new store will feature the same basic sports-bar-and-restaurant concept and serve the same basic foods: chicken wings, burgers, sandwiches, and the like. The new restaurant can’t rely on the same distributors and suppliers. A new business plan is needed.

• What steps should the new restaurant take to create a new business plan?
• Should it attempt to serve the same customers? Why or why not?

This New York Times video, “An Unlikely Business Plan,” describes entrepreneurial resurgence in Detroit, Michigan.

The Essential Elements: 8 Key Components of a Comprehensive Business Plan

• September 27, 2023
• Mariah Parks

Embarking on a journey as an entrepreneur requires more than just a great idea; it demands meticulous planning and strategic thinking. A well-thought-out business plan acts as the cornerstone upon which your entrepreneurial dreams are built. It’s the document that not only paints a vivid picture of your vision but also demonstrates your commitment to making it a reality.

Think of your business plan as the compass that will steer you through the uncharted waters of the business world. It’s not just a mere formality but a vital tool that will guide you through the complexities of starting and scaling a business. Whether you’re seeking investors, applying for a loan, or simply charting your path forward, a comprehensive business plan is your secret weapon.

In this blog post, we’ll dissect the eight essential components that make up a robust business plan. Each element plays a critical role in shaping your business’s trajectory, from clarifying your mission and defining your target market to fine-tuning your financial projections and outlining your marketing strategies. Together, these components will empower you to navigate the challenges, seize the opportunities, and ultimately transform your entrepreneurial vision into a thriving and sustainable reality. So, let’s dive into the world of business planning and set you on the path to success.

Executive Summary: Painting the Big Picture

The executive summary, although appearing at the outset of your business plan, is often the final piece you’ll create. This strategic snapshot distills your entire plan into its essential elements, making it a crucial first impression. Within its concise framework, the executive summary conveys your business’s fundamental mission, outlines the enticing market opportunities it seeks to seize, and underscores the competitive edge that sets you apart. It provides a glimpse into your financial outlook and reveals your blueprint for growth. When crafted effectively, this executive prelude can pique the curiosity of potential investors or partners, compelling them to delve deeper into the comprehensive details that follow. It serves as your business plan’s enticing opening chapter, beckoning readers to explore the full narrative of your entrepreneurial journey.

Business Description: Defining Your Identity

Here, you’ll elaborate on your business idea, its mission, and vision. Explain your product or service, detailing its unique features and benefits. But that’s not all; the stage is set for you to unveil your understanding of the market. Share insights into your target audience, their demographics, preferences, and pain points. Explain how your positioning strategy will set you apart from competitors and emphasize the value you offer to your customers in a way that others cannot.

Additionally, clarify the essential structural elements of your business. Detail your company’s legal structure, whether it’s a sole proprietorship, partnership, corporation, or LLC. Mention the location of your operations and provide any relevant historical context that sheds light on the genesis of your business idea and its evolution over time. This section serves as the foundation upon which your business plan is built, ensuring that readers have a solid understanding of your business’s roots, purpose, and the value it brings to the market.

Market Analysis: Knowing Your Landscape

Conducting a thorough market analysis also involves delving into the regulatory landscape that may impact your business. Evaluate any legal and compliance requirements specific to your industry, as these can greatly influence your business operations. Additionally, examining emerging technologies and innovations within your field is crucial to stay ahead of the competition and adapt to changing market dynamics.

Furthermore, analyzing consumer sentiment through surveys, focus groups, or social media monitoring can provide valuable insights into customer perceptions and brand reputation. It’s also essential to keep an eye on macroeconomic factors, such as inflation rates and interest rates, as these can affect consumer spending habits and overall market conditions.

Incorporating data on regional variations and global market trends can help tailor your marketing strategies for specific geographic areas and potentially expand your reach internationally. A comprehensive market analysis not only demonstrates your commitment to understanding the market but also forms the foundation for making informed business decisions and ultimately achieving sustainable growth.

Organization and Management: Building the Dream Team

In addition to showcasing the qualifications of your management team, it’s important to highlight the cohesion and synergy within the group. Emphasize how their collaborative efforts will drive the company forward and align with the overall business strategy. Provide examples of successful projects or ventures that demonstrate the team’s ability to work together effectively.

To further bolster investor confidence, outline the key decision-making processes within your organization. Explain how the management team will handle major strategic decisions, resolve conflicts, and adapt to changing market conditions. Demonstrating a structured approach to decision-making can instill trust in potential investors and partners. Consider elaborating on your company’s culture and values within this section. Describe the core principles that guide your team’s actions and interactions. A positive and well-defined company culture can be a powerful asset in attracting and retaining top talent, as well as fostering a productive work environment.

Lastly, provide insights into your long-term talent acquisition and development strategy. Detail how you plan to nurture the skills and talents of your existing team members and how you intend to recruit new talent as the company grows. This forward-looking approach can illustrate your commitment to building a strong, adaptable team capable of meeting future challenges and opportunities.

Product or Service Line: Showcasing Your Value Proposition

Delve into the specifics of what you’re offering. Describe the features of your product or service and how it addresses the needs and pain points of your target audience. Highlight your unique selling points and any intellectual property or patents associated with your offering. This section should make it clear why customers would choose your solution over others. You should provide a comprehensive breakdown of your pricing strategy, including any tiered pricing options or subscription models. Explain how your pricing aligns with the value your product or service delivers and how it compares to competitors in the market. Offering transparent and competitive pricing can be a key factor in attracting potential customers.

To strengthen your position, include customer testimonials, case studies, or user feedback that showcase the real-world benefits and positive experiences others have had with your offering. This social proof can substantiate your claims and build trust with prospective customers. Consider discussing your product roadmap or service expansion plans. Share insights into how you intend to innovate and improve your offering over time, demonstrating your commitment to long-term customer satisfaction and product evolution.

Lastly, touch upon your customer support and service capabilities. Describe the resources and channels available to assist customers, such as a dedicated support team, online resources, or community forums. A robust customer support infrastructure can enhance the overall customer experience and set you apart from competitors.

Sales and Marketing Strategy: Spreading the Word

This is where you outline how you plan to attract and retain customers. Describe your pricing strategy, sales channels, and distribution methods. Detail your promotional efforts, such as advertising, social media, content marketing, and partnerships. Include a timeline for launching your product or service and building brand awareness. In addition to your pricing strategy, elaborate on your sales tactics and how you intend to convert leads into paying customers. Discuss your sales team structure, if applicable, and their roles in the sales process. Explain any lead generation strategies, sales scripts, or customer relationship management (CRM) systems you plan to implement to optimize your sales efforts.

Provide a breakdown of your customer acquisition cost (CAC) and customer lifetime value (CLV) calculations, showing how your sales and marketing strategies align with sustainable growth and profitability. This financial analysis can assure investors and stakeholders that you have a clear grasp of your business’s financial viability. Consider discussing your post-sale customer engagement plan, which can include onboarding processes, customer retention strategies, and upselling or cross-selling opportunities. Building a loyal customer base is often more cost-effective than acquiring new customers, so outlining your retention efforts is crucial.

Detail your digital marketing strategy, highlighting the specific platforms and channels you plan to leverage, as well as your content creation and distribution plan. Explain how you will measure the effectiveness of your marketing campaigns through key performance indicators (KPIs) like click-through rates, conversion rates, and return on investment (ROI).

Lastly, emphasize any strategic partnerships or collaborations that will bolster your marketing efforts or expand your reach. Whether through affiliate marketing, influencer partnerships, or co-marketing initiatives, these alliances can play a significant role in amplifying your brand’s visibility and credibility in the market.

Financial Projections: Crunching the Numbers

Numbers speak volumes in the world of business, and investors want to see a solid financial plan. Provide realistic projections for revenue, expenses, and profits over the next three to five years. Include a detailed breakdown of costs, such as production, marketing, and overhead. Address how much funding you need and how you plan to use it. Make sure your financial projections are backed by thorough market research and grounded assumptions.

In addition to revenue and expense projections, offer a clear outline of your financial assumptions and variables. Explain the factors that underpin your financial model, such as growth rates, market penetration, customer acquisition costs, and churn rates. Highlight any external factors that could impact your financial projections, like changes in market conditions, regulatory shifts, or competitive dynamics. To further bolster the credibility of your financial plan, include sensitivity analyses or “what-if” scenarios that demonstrate how variations in key variables could affect your financial outcomes. This not only shows investors that you’ve considered potential risks but also showcases your ability to adapt and make informed decisions in dynamic business environments.

Consider presenting a detailed cash flow forecast alongside your income statement and balance sheet. Cash flow is critical for day-to-day operations and can significantly impact a company’s ability to grow and weather financial challenges. Highlight your plans for managing cash flow, such as working capital strategies, credit terms with suppliers, and contingency plans for unexpected expenses. Address your funding needs with transparency. Explain not only how much capital you require but also the timing of these capital injections and how they align with your business milestones. If you’re seeking investment, provide a breakdown of how the funds will be allocated across different aspects of your business, such as product development, marketing, and scaling operations.

Lastly, demonstrate your commitment to financial discipline and risk management. Discuss your plans for establishing financial controls, key performance indicators (KPIs) to monitor financial health, and any measures in place to mitigate potential financial setbacks. A robust financial plan should not only showcase your growth potential but also your ability to navigate the financial complexities of your business.

Funding Request: Seeking Investment

If you’re seeking external funding, clearly state how much capital you need and what you’ll use it for. Whether you’re approaching banks, angel investors, venture capitalists, or crowdfunding platforms, this section should outline the terms of your funding request. Specify whether you’re seeking debt financing, equity financing, or a combination of both. Be transparent about the potential risks and returns for investors.

In addition to the specifics of your funding request, provide a compelling narrative that explains why your business is an attractive investment opportunity. Highlight the market demand for your product or service and the growth potential it offers. Emphasize how your management team’s expertise and track record position your company for success.

If you’re seeking equity financing, detail the ownership structure of your business and the percentage of equity you’re willing to offer in exchange for the investment. Discuss any potential exit strategies for investors, whether it’s through an initial public offering (IPO), acquisition, or other means. Demonstrating a clear path to a profitable exit can instill confidence in equity investors. For debt financing, lay out the terms and conditions of the loan or credit facility you’re seeking. Explain the interest rates, repayment schedule, and any collateral or guarantees you can provide. It’s crucial to assure lenders of your ability to meet your financial obligations and manage debt effectively.

Consider addressing the potential risks and challenges your investors might encounter. Be honest about market risks, competitive threats, and any regulatory hurdles your business may face. Providing a risk assessment shows that you’ve thoroughly evaluated the landscape and are prepared to mitigate potential setbacks.

Lastly, emphasize the potential returns on investment (ROI) that your investors can expect. Use realistic financial projections to showcase the growth trajectory of your business and how it can translate into value for investors. This can include projected revenue growth, profitability milestones, and potential exit valuations. Investors want to know not only how their capital will be used but also the potential rewards for taking the risk of investing in your venture.

Conclusion:

Crafting a business plan is a foundational step toward building a successful enterprise. It’s a dynamic document that evolves with your business and guides decision-making along the way. By including these eight essential components—executive summary, business description, market analysis, organization and management, product or service line, sales and marketing strategy, financial projections, and funding request—you’ll be well-prepared to communicate your business idea effectively, secure funding, and steer your company toward growth and prosperity. Remember, a well-thought-out business plan is not just a tool for external stakeholders; it’s a roadmap that can lead your business toward its full potential.

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