Key reasons why you need a business plan for your startup
1. A roadmap to success
To succeed in today’s competitive environment, you need a sound business plan and solid execution capabilities. A critical step is to develop a thorough understanding of your competitive environment and to identify the key drivers that will determine your faith. It is a good idea to formalize your business plan and to update it throughout the life of your company. This will substantially increase the odds of you coming up with a viable business model and an effective strategy. Moreover, it conveys the message to your business partners, current and prospective investors, and employees that you know what it takes and it provides guidance in times of doubt. Your business plan is truly your company’s roadmap to success.
2. Getting funding
For any business, but particularly for startups, having adequate funding is key to their business survival. Investors, such as angel investors and venture capitalists, might not pay attention to your business proposal at all if you don’t have a solid business plan in place. While investors don’t need to know every nitty operational detail, they attach a lot of importance to your business model, your expected financial metrics, and funding requirements. Having these building blocks in place helps a great deal in securing funding.
Essential components of a winning startup business plan
Now, it is time to start writing a winning startup business plan. But what distinguishes a good plan from a bad one? There are several components that need to be included.
1. Define the purpose
The first step is to be crystal clear about the purpose of your business plan. Is it for internal purposes, do you want to attract an external investor, or do you intend to apply for a government grant? In essence, your business plan will remain largely the same, but it will require minor tweaks depending on who your audience is.
For instance, a potential business partner would want to know whether the business will thrive in the long term and whether the current valuation offers an attractive entry point. Investors might accept higher risks in return for higher rewards. In contrast, a lender is concerned about your ability to pay back the loan and is usually more risk-averse. Hence, knowing your audience is vital in presenting a startup business plan that resonates with them.
2. Write an executive summary
Every winning startup business plan should include an executive summary to allow time-strapped decision-takers to discover what you have to offer. It needs to be comprehensive, persuasive, clear, inviting, and short. Investors and bankers often use this summary as a first screening device. Thus, it is the crowning glory and arguably the most critical section of your startup business plan. It is usually also the last section of the business plan that you will actually write.
But what should you include in this section? You should highlight the most important aspects of your business plan here, such as your product differentiation, your competitive advantage(s), the overall market opportunity, your implementation strategy, and the risks and risk-mitigating factors.
An outstanding executive summary should also briefly touch on the skills and experiences of the management team. Why are you well-positioned to capitalize on the opportunity and in which way does the management team complement each other? If there is one section where you may brag about your past success stories, it should be here. Past successes are extremely convincing arguments to secure external funding. So, don’t forget to highlight them!
Last, the executive summary should also include a snapshot of your financial position and financial goals. Since the objectives of potential investors and lenders differ, ensure that it is adapted to your recipients’ motives. Investors are concerned about your company’s current valuation, the opportunity to realize juicy returns, and the funding requirements down the road. In contrast, lenders seek reasonable assurance that they will see their money back. If you always keep this in mind, you are already well on the way to writing a winning business proposal!
3. Conduct a competitive/industry analysis
So far, the executive summary has captured the attention of your audience. They now want to know more about your business. They are looking for answers to specific questions, such as details about your target market and your strategic plan. There are several excellent frameworks for developing an in-depth understanding of your market. We will subsequently discuss SWOT and Porter’s Five Forces analysis. While there is some overlap between these frameworks, they help you think about your company in different ways and establish an in-depth understanding of the industry and your competitors.
A SWOT analysis identifies the Strengths, Weaknesses, Opportunities, and Threats that a company faces. You can perform a SWOT analysis for your business as follows:
- Create a SWOT matrix with four quadrants and label the quadrants.
- Assess each quadrant.
Strengths and weaknesses are focused on the internal environment while opportunities and threats are focused on the external environment.
Strengths and weaknesses: Strengths are the qualities that set your business apart from your competitors. For example, a powerful brand identity, a loyal customer base, abundant financial resources, intellectual property, and know-how can provide you with a distinct advantage. In contrast, weaknesses are areas where you suffer from a competitive disadvantage, such as a lack of access to skilled workers, insufficient funding, lack of social media presence.
Opportunities and threats: Opportunities and threats are plentiful in the external environment. It concerns both macroeconomic and microeconomic factors.
- Macroeconomic factors can be economical, political, cultural, social, demographical, technological, and environmental.
- Microeconomic factors can be related to customers, suppliers, competitors, and distributors.
Once you have the SWOT matrix ready, it’s time to draw connections and make assessments. Such as how the business can play to its strengths to overcome its weaknesses and how it can convert the threats into opportunities?
5 Competitive Forces Analysis
Porter’s five forces model is an effective framework for analyzing the competitive environment and the overall attractiveness of the industry. The model assesses the five forces that shape the long-term profitability prospects of an industry. Such an analysis should be an essential component of a successful startup business plan because it provides you with vital insights into the industry’s structure.
Force 1: Competitive rivalry
Competitive rivalry refers to the other players in the industry that are competing with your company. To determine the intensity of the rivalry among existing firms, consider the strength of your competitors, the industry lifecycle, product differentiation, switching costs, and the proportion of fixed costs versus variable costs.
Force 2: The bargaining power of suppliers
The bargaining power of suppliers refers to the power which suppliers exercise over the price negotiations and other terms of sale. For example, if you want to buy products that are sold by only a handful of suppliers, you’re likely to have to agree to their terms. This type of industry structure is not appealing to new entrants. An essential component of your business plan should be to avoid overreliance on a single supplier and diversify your supplies.
Force 3: The bargaining power of customers
On the opposite spectrum, if your customers have a strong bargaining position, the overall profitability of the transaction(s) will be low. The buyers will push for better terms, superior quality, and additional services. The presence of strong buyers decreases the overall attractiveness of the industry. As a startup, it might be quite a challenge to convince a strong buyer to part ways with an existing supplier. Not only will you have to compete on price, but you will also have to match or exceed the quality of your competitor’s product or service.
Force 4: The threat of new entrants
Another force that should be properly assessed in a winning startup business plan is the threat of new entrants. If the barriers to entry are low, the prospects of long-term profitability are bleak. There are many factors that could increase the threat of entry by new entrants, such as a push by the government to enhance competition, insignificant economies of scale, low capital intensity, minimal exit barriers, low switching costs, and limited product differentiation.
High barriers will discourage potential competitors from entering the market while low barriers to entry will attract additional competitors if a profit is to be made. The ideal industry structure is characterized by high barriers to entry combined with low exit barriers. It is the recipe for high profitability and reduced execution risk since it is easy to exit the industry in case of poor performance.
Force 5: The threat of substitute products
The threat of substitute products is the fifth and last force in Porter’s framework. The threat is that a customer can easily swap your product or service for a substitute in case of a price increase. For example, a customer might buy almond milk instead of coconut milk when the price of almond milk is increased. Substitute products might provide indirect competition and substantially limit your ability to increase prices and enhance your profit margins. The threat of substitutes is determined by relative price differences, switching costs, and the willingness of a consumer to use a substitute.
4. Formalize your mission statement, strategy, and organization
In this section of the startup business plan, you should formulate your mission statement and strategy. What do you want to achieve as a company and what is your strategy to realize those primary objectives?
You can also highlight the background and skills of the management team, key employees, and the members of the board of directors in this part of your business plan. It is highly beneficial if your skill sets are complementary so that your likelihood of success as a team increases.
5. Financial projections
The financial projections are the last essential component of a winning business plan. While your company might be profitable, you can still run out of cash. A best-in-class approach is to develop an integrated financial model. Integrated financial statements link the income statement, balance sheet, and cash flow statement to each other. Any change in one of these statements will lead to changes in the other statements.
While most entrepreneurs have a solid understanding of the income statement, the balance sheet and cash flow statement are often overlooked. However, a company’s cash position and cash generation are vital to the company. The blood of a healthy business is its cash flows. A company can have perfectly healthy assets, but assets deprived of cash will starve off. So, if you can identify cash flow problems early and take the necessary steps to avert a cash flow crisis, your business is likely to survive and thrive.
A business plan without financial information is unconvincing. Financial planning is essential to help you stay on the right track, and you are much less likely to run out of cash if you plan ahead. It will help you determine the right time to undertake major investments, hire additional staff, or decelerate your growth to preserve cash. As a startup, I recommend having financial projections for at least 18-24 months. It is also important that you perform a variance analysis between your budget and the actual financial results. It is key that you understand where the differences are coming from.
You should add some additional forecast periods to show investors your full business potential. Investors are particularly interested in your growth story and the associated profitability. If you can show them financial projections that are based on well-researched and not overly optimistic assumptions, you are much more likely to establish credibility and secure their backing.
A winning business plan is your roadmap to success and a strong enabler to secure future funding. Every winning business plan contains several essential building blocks. These building blocks are:
- Define the purpose: Be clear about the purpose of the business plan
- Summarize the business plan in the executive summary
- Conduct competitive/industry analysis: An in-depth understanding of the competitive landscape is essential to succeed
- Formalize your mission statement, strategy, and organization: Defining your primary objectives and implementation strategy are essential
- Financial projections: Ensure that your business plan is backed by a financial plan. This way you are much less likely to run out of money.
A business plan is not just a one-off exercise. It is a living document that will require future updates to reflect changes in the operating environment. However, it is an essential investment, mainly in terms of time, that will bear fruit in the long term.