Jim Ellis from Stanford Business School talks about the elements of a successful business plan as well as common mistakes related to its development and use.
Clients should explain what makes them the right people to be in their business of choice by outlining the relevant experience they have. This will include:
- any previous and current experience of the industry or business area
- examples of previous businesses they have set up and run. This is particularly important for clients who have run businesses in other countries. It shows initiative, resourcefulness and a track record in business development
- an indication of their strengths and weaknesses and what they will do to address the weaknesses in order to make the business a success. The strengths will include skills, knowledge and personal qualities. The analysis of weaknesses will show where they need to draw on the resources and expertise of others. Thinking this through will bring home to your clients that they are good at some things, but that they cannot usually be expected to do everything themselves.
- examples of their ability to get through the tough times. This will demonstrate where clients have shown determination, and the qualities and skills they used to get through those times. This in turn will show that they have the strength to get through the challenges they will encounter in their business.
Selling the Business Idea to a Potential Funder
The business plan should be well-drafted, so as to attract the interest of potential funders. The plan must convince them, or at least very assure them, that if they put money into your client’s business they will be making a good investment and not throwing their money away. The description of the Unique Selling Point (USP), where the client explains what is so different about their business, plays a vital role in exciting this interest. The business plan will go on to explain the business idea and include a brief section on your client’s competitors.
Money – what the business will make and what it will cost
The business plan will contain financial information, explaining the income that the business is likely to make, the price of the goods, the quantity of products and the likely cost of running the business.
Prices should be set by what customers will be prepared to pay, not by how much it will cost clients to make a product. There is, however, a break-even point, which is the minimum product price that will cover the costs of production.
In terms of product volume, clients will need to know their market. They need to have a good idea of the number of customers who will be interested in, and pay for, their product.
This knowledge can be based on what clients have sold, or tried to sell, before they came to you for assistance in developing their business further. The questions you need to ask your client about this previous experience are:
Who are/were your customers, and will they keep on buying? Were they friends, family members or neighbours?
How long did it take to attract your first customers? This will give them some idea of the time it will take to set up the business and attract new customers. It will also indicate how long it will take to establish the business to a point that will make it profitable.
Ask your clients about their previous experience of the industry in which they want to set up their business. This will give a good indication of who and where the customers are and the nature of their business opportunities.
Talking to similar businesses is an important way of finding out about the market for your clients’ goods. Although it is understandable that these competitors may not be entirely open about their businesses, it is always worth asking the question in case some are willing to share experiences.
Your client needs to be aware of the direct and overhead costs of making the product. Direct costs are the resources it takes to make the product, including your client’s time. Clients frequently forget to factor in their time when working out costs. Time includes the purchase of raw materials and production and delivery times. Time spent invoicing and chasing payments from customers should also be considered.
Overhead costs are costs that will be fixed regardless of the product, and include heat, light, water, telephone, travel, rent and accountants’ and solicitors’ fees. Your clients will also need to pay themselves a wage from the business. Some business advisers call this ‘personal survival income’ – what clients need to live and support their families. One way for clients to determine this cost is to look back over the last three months and work out their living costs for that period. This will give a good indication of actual living costs to include in the calculations.
The break-even point is the point at which the income from sales will match your client’s overhead costs.
Testing your Client’s Business Plan
Your clients will need to show their plans to potential funders when making the case for funding. To ensure that the plan is as good as possible, it may be helpful to go through it with the client and ask some hypothetical questions about possible events. In this way, you can both identify where the plan needs to be strengthened or where a client’s assumptions are incorrect. Potential funders will often ask ‘What If…’ questions, to make sure that your clients know what they are doing and can make a success of their businesses.
Here are some useful links regarding the essential elements of a Business Plan