Business Planning: The Basics
November 18, 2013
Make Sure Your Plan Covers Three Key Areas
Many how-to manuals and templates for business plans are oriented toward
attracting venture capital or helping secure a loan. While there’s nothing wrong
with that, it shouldn’t obscure two points. First, business plans have value for
all closely held businesses,
not just start-ups. Second, well-prepared plans have as much — or more —
value for owners as they do for investors or lenders.
A business plan can help you identify your company’s strengths, understand
the competition, improve your offerings, sharpen your marketing, master your
finances and prepare for long-term growth.
Here are three key areas your plan should cover:
1. Define your company
Your business plan should begin with two elements that define your company: a
mission statement and a value proposition.
A mission statement is a simple, declarative sentence that describes a
company’s essence and purpose. The sentence should focus on the human needs that
your business meets. For example, Cisco Systems describes itself as a “worldwide
leader in networking that transforms how people connect, communicate and
collaborate.” Note that Cisco makes no reference to a particular product or
product line in its mission statement. Instead, it explains how it makes its
customers’ lives easier and helps them prosper.
A value proposition is a concise description of how a company’s products or
services benefit customers. It typically emphasizes either quality or price. For
example, Apple highlights its products’ elegance, usefulness and ease of
operation. Big-box stores, on the other hand, often emphasize affordability in
their value propositions.
2. Analyze the environment
Your company operates in two environments defined by opportunities and
threats. One is external, the other internal.
Questions to address regarding the external environment include:
- Who are your competitors and what are they doing?
- Is technology changing in ways that will affect your business?
- Are social trends affecting the way your customers think or what they want?
- How will the political and regulatory climate help or hurt your business?
- Is the economy weak or strong, and what impact will that have?
Questions regarding the internal environment include:
- What are the advantages and disadvantages of your physical setup?
- What are your strengths and weaknesses and those of your employees?
- What is your company’s production capacity?
- How strong — or weak — is your company financially?
Work through these questions to help make sure your strategy is in tune with
an honest assessment of your company’s situation.
3. Make financial projections
Solid financial projections are crucial. They allow you to map out your sales
objectives over a period of time and predict the effects of targeted sales on
assets and liabilities. Your company should engage in two types of financial
projection: short-range planning and long-range planning.
Short-range planning uses careful analysis of previous performance and recent
trends to project your income statement monthly and generate a cash budget for
the next 12 to 18 months. This allows you to anticipate short-term borrowing
needs and makes it easier to arrange for financing before you need it rather
than in the middle of a crisis.
Long-range planning projects your balance sheet over a longer period of time,
often three to five years. This type of planning helps your company manage
growth effectively. It’s natural to want to expand your business but keep in
mind that rapid sales growth is usually accompanied by asset growth. These
assets must be financed, often with higher levels of debt.
When your financial projections show debt increasing relative to equity or a
mismatch between assets and their funding, you may have to make some decisions.
Long-range plans give you an opportunity to modify your growth objectives for
safety’s sake and identify opportunities to restructure debt to free up cash
flow —opportunities you might miss if you were flying blind. A final element
that should be included in every business plan is a break-even analysis. In a
break-even analysis, you use the information from your income statement to
calculate the minimum level of sales to produce a profit. If your company
operates below this point for any length of time, it will lose money. You can
help solve the problem by reducing your fixed costs, or costs not directly
related to sales.
Small Business Administration offers additional advice on crafting a
business strategy, and
SCORE (the Service Corps of Retired Executives) provides free online
templates for business and financial plans. City National Bank also offers
financial planning assistance
for you and your business.
Let City National Bank help your company achieve your objectives with tools
and services to help
improve cash flow and
fund operations. Call us at (800) 773-7100 or
Email Us and request that a Relationship Manager contact you.
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