Before getting too far down the road with your business planning process, you will need to complete a thorough market analysis based on the research you did in deciding to launch your business.
Your market analysis not only provides an overview of your industry, but also the conclusions you were able to draw from your market research findings. While there is no absolute method for including a market analysis, under most circumstances you are going to want to include most or all of the following points as you create this valuable section of your plan:
1. Industry description and outlook
Regardless of how you decide to proceed with your market analysis, you will almost certainly want to start this section of your business plan with a description of your company’s industry. Research your industry’s growth and note its current scope. Then, discuss some of the business characteristics of your industry, such as its projected growth rate. Include the major customer segments.
2. Introduce your target market
Once you have described the overall industry and marketplace, next indicate how you have narrowed down your target market to a workable size. One of the biggest errors new business owners make is in keeping their target market too broad, which leaves them in the impossible position of trying to meet the needs of too many diverse customer groups. This obviously runs the risk of stretching limited resources too thin.
3. Distinguish target customer characteristics
Next, describe the critical needs of your targeted customer base and to what extent–and by whom–these needs are currently being met. This is also the place to detail the demographics of your customer group. If there are cyclical purchasing trends, including seasonal buying, this is the place to note them as well.
4. Target market size and growth
You will also want to include additional details about the size of your targeted market. Conduct sufficient research to provide data on total annual purchases within your targeted marketplace. In addition, do sufficient research to create a reasonable forecast of market growth.
5. Market share percentage
Once you have described the size and potential growth for your targeted market, next identify the market share percentage and number of customers you believe you will be able to gain within a defined demographic area. Include justification for the numbers you come up with.
6. Pricing and gross margin targets
Explain your pricing strategy, gross margin levels and any special pricing schemes you plan to use, such as discounts.
7. Competitive analysis
Finally, identify your competitors and their targeted markets. Also, make note of any indirect or secondary competitors impacting your target markets. Include information on their current marketshare as well as what you perceive as their strengths and weaknesses.
8. Barriers and regulatory restrictions
Discuss any barriers to entering the market that you have identified. These might include technology changes, unusually high investment costs, lack of qualified personnel, and other hurdles. In some cases, there may be regulatory restrictions impacting your business. In that case, describe how you plan to comply with these regulations.
Your market analysis forms a key part of your business plan. Interpreting your market research results in a clear and concise manner will provide a strong foundation for your overall plan.
Unfortunately, the SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis is one of the more cliched components of any business plan. While the cliche exists, the exercise of running through the components of a thorough SWOT is helpful for any business, regardless of its “stage.” Furthermore, including a SWOT (or at least some form of one) in a business plan has become somewhat of an expectation among private equity investors who might fund your business.
The S.W. portion of your SWOT encompasses an internal analysis of the strength of the business including the plan itself, the ability of management to execute and the robustness of any intellectual property or tacit knowledge held by the company. It’s a visceral look at the businesses’ ability to succeed. For some individuals, it can be difficult to find personal and business strengths within yourself or your own organization. In the case of entrepreneurs, I’ve always found the opposite to be the case.
In many startup venture, it can be difficult to avoid what could be called “startup bias.” From the founders’ perspective, the bias generally leans toward the “we’ll never fail.” From the perspective of investors a bias will lean more on the side of “you’ll probably fail.”
Like strengths, weaknesses are always internal. Weaknesses can be as simple as understanding a gap in talent to finding highly-deleterious legal blockades to your product or service. Full-fledged analysis is helpful to understand the chinks in the proverbial armor, whether large or small.
An Industry View
The O.T. portion of your business plan comes from the 30,000 foot-level. It represents an industry view, an in-depth look at where the Blue Ocean of opportunity truly exists. In some instances, it a story told about how a product or service provides such an innovative leap that the company can easily capture low-hanging fruit and gain an advantage–some might call it first movers.
But where low-hanging fruit exists, competition is sure to follow. Since the term “first mover’s advantage” has been effectively written-off as a misnomer, threats must remain extremely credible to the livelihood of your organization. Understanding existing and potential threats can also paint a preemptive picture for planning on how to deal with them even before they may arise in the future–an extremely helpful exercise for the entrepreneur.
Not Just for Startups
SWOTs are developed for all types of business plans, not just startups. They are particularly helpful for the company looking to launch a new product or service or seeking of potential opportunities and problems inherent in entering new markets with an existing product. Plans may help to clarify the direction of an existing business or justify lofty future growth assumptions in the case of a merger or acquisition. In short, SWOT is universal in its business application, just be careful not to overuse or abuse it.
My personal suggestion: don’t spell out S, W, O, T in the plan itself, but include the meat and potatoes of a typical SWOT, complete with an in-depth dive into how the company will most-likely succeed and how it will possibly fail. Ultimately, the goal of your analysis is for both internal managers and potential external investors or buyers go gain a deep understanding into the potential risks and rewards inherent in the company.
Developing a business plan is an important part of owning and operating a business, but if you think of the process only as a means of attracting investment or guiding you through startup, you are ignoring the many other ways a business plan becomes essential to the success of your business.
Here are a few examples of business plan needs throughout the life of your business:
When thinking about the need for a business plan, a business launch is usually the first thing that comes to mind. This popular type of business plan differentiates itself from other types due to its focus on describing the company, explaining the products or services your business will provide, marketing analysis and plan and financial projections, including cash flow projections, profit, expenses and income.
Also an internal plan, this type of business plan is often viewed as the natural successor to a business launch plan and includes some of the same components, but updated. Your operations plan should map out company operations for the coming year and include specifics regarding individual employee roles and responsibilities.
Internal project analysis
Unlike the business launch plan, this business plan is narrow in its approach and developed to provide projections for internal business decision-making. Its purpose it to evaluate a proposed project or action. Your financial analysis should include any additional personnel costs, technology needs and operating expenses. Include the project’s capital needs and assumptions for repayment. You will also want to include a marketing plan specifically targeting the proposed project.
The primary function of your strategic business plan is to focus on your company’s vision, mission, goals and action plan for achieving them, including timeline. This plan should also define critical success factor. A hallmark of this type of business plan is that it cuts across all department to provide the big picture for your business. Often, advisory boards are more involved in development of this type of business plan over any other.
Also known as a growth plan, this customized business plan may be written for either internal or external purposes. Whether internal or external, financial projections will be the primary focus. A plan meant to attract outside investors, however, will also need to include background information on the company and its operations to-date to provide potential investors with the details necessary to make a decision. If your expansion does not involve outside capital and will only be used internally, there is no need to include obvious company details.
A feasibility plan includes elements of both project analysis plans and expansion plans. However, a feasibility plan’s primary purpose is just as its name implies: to establish the feasibility of a proposed business venture and make recommendations for moving forward (or not). This type of plan focuses on demand for the proposed product or services made possible by the new venture. A feasibility plan will also include capital needs and profit projections in formulating recommendations.
Most small business startups can benefit from outside acquisition financing and most often, at least a portion of that funding will come in the form of business loans. As you ready your business plan for review by a lender, your focus is likely on the financial projections in your plan. But don’t sell other areas short. Your management competency, market outlook and assets are just a few of the other components that will be scrutinized.
Here are some of the factors your lender will consider when making the decision whether to provide you with a business loan.
Your potential lender is going to want assurances you have the necessary expertise onboard. Be sure your plan details your education and experience, as well as that of your management team. In addition, include information on your board officers and advisors, if applicable. Your plan should communicate a high level of both competency and commitment.
Your lender is going to want to understand your business, your competitors, your customers and the industry in which your business will operate. Completing a thorough market analysis as part of your business plan before applying for a loan will provide this necessary information to your lender.
Your lender is going to want collateral in the form of personal and business assets that could be sold for cash if your business does not meet its financial goals. Identifying all your business assets within your business plan provides a listing of potential collateral for your lender to consider. Keep in mind, however, that the value of most of your assets will be discounted from market value when viewed as collateral. The lender will also determine your collateral coverage ratio, calculated by dividing the total discounted collateral value by the amount of your loan request. Both collateral and projected cash flow are taken into account when determining your ability to repay a loan.
The more you are able to invest in your business, the easier it will be to obtain financing. New businesses will most often use a combination of equity financing and debt financing. Be sure your business plan describes in detail all anticipated outside funding. Your lender will want to review your plan to determine if your request for debt financing keeps your debt-to-equity ratio within acceptable limits. If your debt-to-equity ratio dictates, seek additional equity investment before requesting a loan.
There are a lot of steps to take when launching a new business or embarking on a new product venture, but writing your business plan is probably one of the most important.
However, there are many common missteps that can occur when putting together a business plan. Number one on the list is the biggest error you can make: thinking you don’t need a formal business plan at all. This is often the mindset when a business owner isn’t seeking outside investment. But a business plan does more than attract investment. The business planning process itself will help you determine if your great idea is truly a viable business. It’s the single most important step you will take in becoming an entrepreneur.
Here are five more typical–but avoidable–errors that harm the process:
1. Failing to acknowledge competition
In your pursuit to show your business idea in the best possible light to investors, it can be easy to gloss over the competition. But that would be doing yourself a disservice. One of the purposes of your business plan is to do the necessary research to determine if your business idea can be transformed into a viable business. Not digging deeply enough when researching competitors will make investors wary of your ability to succeed.
2. Being amateurish
It may sound like one of the least important things to worry about, but how well your plan is written and how it is presented in final printed form are important. You don’t want an important investor to get a few pages into your plan and start to doze off or find it riddled with grammatical errors. Unless you are a professional writer, invest in a professional business plan writer or consultant. Likewise, an eye-catching, well-designed logo for your new business gracing the cover of your business plan will give a professional finish.
3. Being inconsistent
Business plans con be complicated. It is common to rewrite some portions and not others. But be sure to read the final version several times over, enlisting friends or trusted colleagues to review it as well, to avoid any errors or inconsistencies. Don’t make a financial assumption in one section of your plan, then turn around and contradict it later in the document.
4. Too much hype
You might think your business idea is the next great thing, but you need to back up that kind of enthusiasm with hard research, not a bunch of hype and hyperbole. Peppering your business plan with too many meaningless superlatives like “greatest” and “incredible” doesn’t add anything of substance. Instead, rely on the thoroughness of your market research and analysis to “wow” readers.
5. Poor quality research
Doing thorough research and analysis is not something you can fake. An investor will immediately identify “fluff” in place of facts. Again, if this is not your forte, hire a consultant to provide some assistance based on your knowledge and experience.
There are plenty of land mines to avoid as you go through one of the most important steps for launching a business. These are just a few of the mistakes to avoid in bringing your plan to fruition.
These components of your business plan are not the only areas a lender will want to review closely, nor will everything your lender consider be addressed by your business plan. For example, you will also want to check your personal credit report before applying for a loan.
Your business will not have a proven financial track record at its launch, but you can boost a lender’s confidence in its credit worthiness by providing a detailed business plan that uses market analysis, management expertise, assets and financial projections to clearly communicate the ability of your business to repay its loan.