I’ve been writing a lot about kind of heady stuff lately, focusing on ways to get into the right headspace for strategic thinking and offering tips and tricks for managing your most important resource: your own brain. But of course there are important business-y aspects of running a business, and these are often the things that creative, non-MBA types tend to resist. One of the most commonly dreaded of these things is the business plan.
When I want to convince a student or client to get cracking on writing a business plan — and not just talking about it or doing research for several more months — I explain that a business plan really just boils down to two basic things:
- A narrative portion that describes the business and persuades readers that it will be a success.
- A numbers-driven portion showing that the financials are sound and the business will in fact make a profit.
In reverse order, I like to call these the head and the heart of a business plan.
The narrative portion wins over the heart of readers. It describes the product or service the business will provide, but even more important, it makes it clear just what unmet need in the market the business will serve and creates a case for why you’ll succeed in attracting paying customers. (Wonky business types like to use the term “unique value proposition” for this.)
The heart/narrative portion of your business plan will typically be divided into subsections, such as 1) Mission Statement, 2) Product/Service Overview, 3) Target Customers, 4) Analysis of Competition, etc. Each section individually and collectively seeks to draw readers into your vision so they understand why and how you will attract customers and be a success.
The numbers-driven part of a business plan backs up the narrative material with cold, hard numbers that show your business achieving profits in a reasonable amount of time. Even if your narrative portion is a masterpiece and completely wins the hearts of its readers, you need to back your vision up with realistic projections of income and expenses — and that show income will consistently be higher than expenses, creating profits.
Like the narrative portion, the financial part of your business plan will include a number of subsections which consist of different reports and projections. Even the most basic business plan will typically include the following:
- a break-even analysis showing how much you’ll need to sell of your product or service just to break even
- a profit/loss forecast showing the itemized projected income and expenses by month that your business operations will generate
- a cash flow projection showing not only monthly income and expenses from operations, but other cash in (like loans) and cash out (like start-up costs) of the business, revealing whether you’ll be able to pay your important expenses on time; and
- a start-up cost itemization showing what you’ll need to spend to get the business up and running, before it earns its first dime.
Most small start-ups won’t need exhaustive financial analysis and can get away with these basic reports. Businesses that are investing or needing to raise more significant capital will often need more projections, including different versions to reflect best and worst case scenarios. But they all boil down to the same thing: showing in line-item detail that income will exceed expenses.
When your business plan appeals both to the hearts and heads of readers, it has done its job.