How to Prepare Business Plans Your Lenders Will Love
Back to:
Next:
Running a business can be a whirlwind experience. Every day can bring new challenges, from servicing customers to dealing with vendors and managing employees. Focusing on the bigger picture can be challenging amid the chaos and day-to-day obstacles.
You’ve probably considered a long-term goal for your business. How do you know if your decisions are consistent with achieving that goal? More importantly, how do you communicate those goals with your employees so they will make the decisions you want them to make?
From a financial standpoint, decision-making between short-term needs and long-term goals can be complex. Deciding which bill to pay, which project to accept, or which new hire to make can be difficult without a road map that leads the way. How do you know if you’re making financial progress toward your goals? How do you know how well your business is performing relative to expectations? How do you prove your company’s financial success to lenders and potential investors?
Two essential business documents can provide answers to these big-picture questions. The first is a business plan, which sets out a company’s purpose and mission. It also maps how a business will transform an idea into profit.
The second document is a business budget. A budget for a business isn’t much different than a personal or household budget. It helps a business keep spending in check, determine whether sales meet expectations, and make critical financial decisions.
These documents are also helpful when communicating information about your business to other necessary parties, like employees, investors, and lenders. In the following sections, we’ll discuss these documents, why they’re essential, and how to create them for your business.
Business Plan
What is a business plan?
In its simplest form, a business plan is a written description of the future of your business. It can be as short as some notes jotted on a napkin or as long as several hundred pages. Most business plans for small to medium-sized companies are 15 to 25 pages.
A business plan generally addresses the what, why, and how of business. What is the business? What are its vision and mission? Why is this business unique? Why will it be successful? How will the business get revenue and control expenses? How will the business reach its goals?
Why is a business plan important?
A business plan is essential for any business for a few reasons. First, developing the plan allows a business owner to think about the business in a much larger sense. A business plan isn’t about day-to-day operational issues but vision and long-term goals. By putting a vision and goals on paper, a business owner can gain greater clarity and purpose concerning where the business is headed.
A business plan is also essential to communicate the business’s purpose and strengths to other interested parties. Before offering to finance, lenders may want detailed information about a business’s planned operations. Investors may wish to have a written road map for viability before committing to a company.
Finally, a business plan formalizes the idea. While your business’s goals and purpose may be obvious to you, they may not be so clear to your employees. By putting a business’s purpose, mission, strengths, and plans onto paper, you turn your ideas into a written guide for your employees. They can then use the written plan to make decisions that align with the business’s stated purpose.
What does a business plan include?
Business plans can come in a wide variety of forms and lengths. However, all business plans have some common elements. Your business plan should have three sections. The first is the Business Concept, where you should describe your business, its products or services, and what makes your company and its products unique.
In its simplest form, a business plan is a written description of the future of your business. It can be as short as some notes jotted on a napkin or as long as several hundred pages. Most business plans for small to medium-sized companies are 15 to 25 pages.
A business plan generally addresses the what, why, and how of business. What is the business? What are its vision and mission? Why is this business unique? Why will it be successful? How will the business get revenue and control expenses? How will the business reach its goals?
The Business Concept
The Business Concept section may include the following documents:
- Executive Summary. An executive summary is a one or two-page document that quickly and concisely summarizes the plan. Readers should be able to look at the executive summary and understand what to expect in the remainder of the business plan.
- Business Description. A business description is precisely what it sounds like. It’s a document that describes your business, from what it provides to its structure to its goals, mission, and purpose. Write the business description section as if the reader does not understand your business.
- Product or Service Description. Use this section to describe your products or services and what makes them unique. It’s important to emphasize why your product or service is different and is positioned to be successful.
The Market Analysis
The second section is the Market Analysis. In this section, you should discuss your potential customers and your competition. The focus is on how your business and its products fit into the overall market and how you will gain market share.
The following are two standard components of a Market Analysis:
- Market Strategies are the foundation of a marketing plan. In this section, you define your target market in detail. It’s essential to describe your potential customers and what product qualities and characteristics are important to your customers. What types of products do they want? What qualities do they look for in your type of service? Readers of your plan should be able to connect the interests of your potential customers to the strengths of your product or service.
- Competitive Analysis is crucial for further defining your advantage in the market. Use this section to describe some of your biggest competitors and how you are positioned against them. Also, think bigger than just your direct competitors. Consider anything that could stand between you and your potential customers. For example, if you run a home improvement business, other local home improvement businesses are your competitors. However, do-it-yourself home improvement is also your competition.
The Financial Analysis
The final section is the Financial Analysis, where you turn ideas and concepts into concrete numbers. The financial analysis section should include projections on revenue, costs, and capital needed. It should also have best and worst-case scenarios to prepare you for any outcome.
Generally speaking, including as much detailed financial information as possible in your financial analysis is best. However, there are a few financial documents that should always be included.
- Capital Required. This is important if you are seeking some kind of investment or financing. This document would show how much money you desire and how it will be used.
- Balance Sheet. A balance sheet is a snapshot of a business’s health at any time. It lists all assets, debt, and equity in the business. Many lenders will look at a balance sheet to gauge a business’s financial health.
- Income Statements. Are compiled regularly, usually every quarter and at the end of a fiscal year. They show all the period’s revenue, expenses, and net income or loss. You should also include projected income statements, especially if you seek investment or financing.
Business plans and financial projections help predict the business’s future success, but they can’t tell you how it has performed in the past or the present. That’s where our second important financial document comes in. In the next section, we’ll discuss a budget in greater detail, including why a budget is crucial for any business and how to create one for your business.