Writing a Business Plan

Before you start your business or searching for money for your business, you should write a business plan—a statement that analyzes your proposed business and explains how it will become profitable. Putting numbers on paper forces you to focus on where the money will be coming from and how it will flow through your business. This is a valuable reality test for you and—equally important—it's something that lenders and investors will want to look at before shelling out money.

A short, simple plan is usually better than a long, complex one—especially for a small business that's just starting out. Formality can get in the way, and it's all too easy to let the details of a complicated plan hinder your progress. One good approach to the task is to imagine that you're sitting across a table from a friend and want to take a few minutes to explain your business idea. What are the key things you'd say? What kind of language would you use? Try to capture that clear, conversational tone in your written plan.

There are many ways to organize your business plan. But however you decide you do it, you'll usually want to cover these main areas.

A Description of Your Business

Start with the business name and your Internet domain name, if you already have one. Then specify the products and services you plan to sell, and describe how your business will meet the needs of customers and clients. You can state where your business will be physically located and analyze the competition you'll face and why you think your business will survive and thrive despite it. Describe any demographic, economic, and industry trends that you believe will help the business get off to a good start.

Your Marketing Program

Here, you can set down your thoughts on who your customers and clients will be, and how they'll learn about your new business and be motivated to give it a try.

How You'll Operate the Business

A key concern here is the competence of those who will be running the business. Be sure to include your own qualifications and those of any co-owners and managers. You might mention the number of employees or independent contractors—full-time and part-time—you expect to hire. You can also describe any special equipment you'll be using and your arrangements with suppliers. If you already have some contracts lined up with customers or clients, mention these in your business plan.

Do a Break-Even Analysis

No one can tell for sure whether a particular business idea will be profitable. You can, however, make an informed judgment by doing what's called a "break-even analysis." This shows you how much money you'll need to bring in to cover your expenses, even before you make a dime of profit. You don't want to start or buy a business unless you're reasonably sure that sales will exceed your costs of doing business.

To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. This requires some preliminary research. To make the job easier, take advantage of business planning books and software, as well as the free Web resources listed below.

• www.businessknowhow.com/startup/break-even.htm

• www.businesstown.com/accounting/projections-breakeven.asp

The Financial Highlights

Here, you should list your fixed costs and your estimates for other costs, and how much you'll need in startup funds—that is, funds to buy needed equipment, supplies, and inventory, with enough cash left in the till to cover other bills until adequate money starts rolling in. Explain where the startup funds will come from: your own funds on hand, or loans or cash from investors.

Probably the most difficult part of the financial highlights portion of your business plan will be your projections for gross income for the first three years. When you start a business from scratch, this is a largely unknown number. At best you'll be making a rough approximation. It's better to estimate on the low side and be pleasantly surprised if the income exceeds your expectations. If you estimate too high and it turns out there's not enough income to meet expenses, the business will struggle to stay alive and may ultimately fail. To be as accurate as possible in projecting revenues, you'll need to rely on your business acumen, information from multiple industry sources, and perhaps input from an accountant or other business consultant. With careful preparation, you can significantly reduce the risk that your income forecast will be too high.

Just Do It

Finally, try not to get stuck on the small details of your plan. Spending months and months formulating a long complicated plan may not be worth the time or effort, especially if there are competitive advantages to starting the business quickly. Investors want to see smart, well-formulated ideas, so focus on putting together a clear and simple plan that covers the key issues well.

Many excellent books are available to guide you, including How to Write a Business Plan, by Mike McKeever (Nolo), and The Successful Business Plan: Secrets and Strategies, by Rhonda Abrams (The Planning Shop). For software, Business Plan Pro, by Palo Alto Software, comes very highly rated. Also, several websites offer practical suggestions and provide sample plans. You might start with the U.S. Small Business Administration site at www.sba.gov where you'll find advice and dozens of real business plans.

Excerpted from Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).

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