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One of the first things would-be entrepreneurs are told to do with their new idea is write a business plan. This critical tool sets the stage for all the fundamentals of a company: Who's running it, research on its target market, profit and loss projections, funding requirements, etc. But it doesn't address every single question that a founder should be able to answer about his or her startup.
While a formal business plan is good to have, there are a few key elements you'll need to work out that could 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.
"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.
Build your vision. The key to business success is having a clear vision of what you want to accomplish as a company. Before you write a business plan, Evan Singer, general manager of small business loan application service SmartBiz, advised coming up with three to five key strategies that will enable you to achieve that vision.
"Sometimes less is more," Singer said. "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 solution 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 include in your formal business plan — hiring, pricing, sales, cost of acquisition, expenses, growth, etc. As with a business plan, Muller noted that your model should be revisited and updated as the realities of your business start to unfold.
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 BijouxxJewels.com, noted that it's important to not only officially register your company, but to also 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.
Road-test 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 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.
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