Entrepreneurs are often advised to write a business plan before they officially start their business. The act of writing the business plan will help focus on the details, find items that were not previously considered and fine-tune the approach to running a successful business.
Before a formal plan can be written, however, there are a few key elements you'll need to work out that will ultimately help you craft that document. Entrepreneurs and business experts recommend taking the following steps before you sit down to write your plan.
Determine your purpose
The primary purpose of a business plan is to show investors, lenders and other potential stakeholders how your company plans to make a profit. Profit is important, but it's far from the only thing that matters when you start a business, experts say.
"Business plans can be helpful tools to clarify ... business activities, [but] they ... encourage entrepreneurs to focus on what they are going to do," said Alan Williams, co-author of "The 31 Practices" (LID Publishing Inc., 2014). "This overlooks two more important questions: 'why' — why it exists and why employees would want to get out of bed in the morning, and 'how' — the values of the business, what it stands for, how people representing the business will behave."
Williams noted that entrepreneurs should take time to identify and articulate their business's core values and purpose, which will serve as your organization's compass for decision making at all levels. Williams' co-author, Alison Whybrow, said that this "compass" can be discovered by having an honest, open conversation with your team.
"One thing that a team might want to do is engage in a formal assessment process — looking at habits, beliefs, values and capability — so that they are working from a clear starting point and have a framework for discussion about working styles, strengths, and individual and collective blind spots," Whybrow said. [See Related Story: How to Write a Business Plan: Outline, Format & Sections]
Build your vision
The key to business success is having a clear vision of what you want to accomplish as a company, experts say. But before you write a business plan, you should come up with three to five key strategies that will enable you to achieve that vision, advised Evan Singer, general manager of SBA loan service SmartBiz.
"Sometimes, less is more," Singer said. "It's far better to do three things very well versus 10 things not so well."
Clarify your business model
A good business plan always includes financial projections, but before you can figure out facts and figures, you'll need to work through potential scenarios to make sure your business model is going to work.
"Start [answering] 'what ifs,'" said Alex Muller, CEO of retail mobile engagement platform GPShopper. "If I sell this product at this price point, and this is the cost of client acquisition, what rates of return can I get? When you're done building [and testing] the business model, then you can go back [and] write a business plan."
Muller said a good financial model should include many of the details you would put in your formal business plan — for example, hiring, pricing, sales, cost of acquisition, expenses and growth. As with a business plan, your model should be revisited and updated as the realities of your business start to unfold, Muller noted.
Work out your name and legal structure
The way your company is structured — sole proprietorship, LLC, corporation, etc. — plays an important role in your business operations and strategy. David Pomije, CEO of jewelry e-commerce retailer Bijouxx Jewels, noted that it's important to not only officially register your company, but also to ensure that you own the naming rights before you work on your business plan. The last thing you want to do is put your company name all over the official documents and website, only to find out that someone else holds the copyright, Pomije said.
Identify your target market
Of everything a new business owner or entrepreneur thinks of, the most murky is often the target market, or the ideal group of people for whom the product or service solves a problem. Grant Leboff, principal of Sticky Marketing Club, says to answer the question, "Why am I uniquely placed to solve the problem?"
"If you are unable to answer the question, you either have the wrong target market or the wrong offering," Leboff wrote in a blog post. "In this case, more work will need to be done before you start targeting your potential customers."
By painting a picture of the customer and then looking internally at your company, you can determine if what you have to offer is the most attractive to the type of client you want, Leboff said. If not, you may need to change your offering or define your target market differently.
Test out your business idea
There's no point in spending time on a formal business plan if you're not even sure there's a market for your idea. Kara Bubb, a product manager at digital asset management software Widen Enterprises, said entrepreneurs should go out and talk to industry experts, potential customers in their target market and other entrepreneurs to determine their business's viability.
"Talk to some real potential future clients [and experts], and ask for some honest feedback," Bubb told Business News Daily. "What do they think about your business idea? Who, specifically, are you targeting with your business? How big is the market? Will your market buy what you are selling? Who is your competition?"
Bubb also recommended identifying your potential opportunities and risks, which can be done by conducting a SWOT (strengths, weaknesses, opportunities, threats) analysis of your business.
Simply writing a business plan will not make your organization successful, but it does give you a road map to get there. The forethought put into the plan identifies the milestones by which you can mark your progress.
Additional reporting by Nicole Fallon Taylor.