Many entrepreneurs start a business overnight without having a business plan, which is often their first mistake.

There are many reasons why people choose not to write a business plan despite this being essential to any company’s success. I constantly hear entrepreneurs say, “I have everything in here,” as they point to their head. Other times, entrepreneurs respond, “I don’t need one; I’m not asking anyone for money.”

But a business plan is really for the business owner, and if you are requesting financing for financial institutions as well. Your business plan should be a road map and a document that highlights the things you have to do to increase the probabilities of being successful.

In general, a business plan has five sections, all of which are very important.
The first section contains the title page, table of contents and a very important component: the executive summary.

This summary explains your business concept (how you plan on making money), the things you need to operate and your financial projections and initial budget. This is also where you highlight the owner’s experience in the industry and why this business makes sense. Most bankers and investors read this document first to get an idea of what the business is about so you definitely want to make a good impression.

The second section is the industry and market Analysis. This section tells the reader how much “homework” you’ve done so far and whether or not it makes sense to invest in that particular industry.

In my entrepreneurship classes, I always stress the importance of having a good market research report to determine whether or not the industry is growing, flat, or declining. I’ve had students quit their business idea after learning that their industry is declining. You can often find reports online, via libraries, business resource centers or through private firms like First Research.

A good market research report will also tell you if it makes sense to start a business in any given community or territory. If you plan to open a hookah lounge in Rancho Bernardo, that might not be a good idea because Rancho Bernardo demographics do not support this type of business. Hookah lounges usually attract college students and/or people from the Middle East or Africa where it is very common to smoke like this, whereas Rancho Bernardo is more of a retirement community.

The third section describes your marketing strategy. This is also an area that bankers like to read to determine if you know what you are doing.

If you plan on opening a restaurant and you’ve added television ads in your marketing strategy this can represent a red flag to any banker. Television ad campaigns are usually expensive and meant to grab a larger audience such as a large city or county. If you have multiple locations throughout the County, then television ads might be a good idea. But if you have a single location, it just doesn’t make sense. It would be best to concentrate your efforts on social media campaigns, local magazine ads, sponsoring local little league teams, or other efforts.

The fourth section is about your organization and how you plan to manage and operate your business.

This section lists the type of legal entity you have chosen (S Corp, LLC, etc.) and your organizational structure (staff needed). It also lists your mission, objectives, the permits and licenses you need, and the owner’s qualifications.

Bankers also concentrate on reading the owner’s qualifications because they need to know if the person running the business has enough experience in the industry or in business in general and whether or not they are capable of running a this business. This section also lists the strengths, weaknesses, opportunities and threats analysis, commonly abbreviated as SWOT, which are very important.

The fifth section describes the financials related to the operation including a start up budget, financial projections and a cash flow analysis. This will tell bankers whether or not you have enough money to start and operate the business, survive its first year, and whether or not the business is financially viable. Bankers concentrate on this section very heavily to determine pay back. This section also contains the conclusion and appendices at the end.

To summarize, business plans are very important because you really need to think it through. It’s not easy to start and operate a business and it is more difficult to survive the first few years. You need to do your homework and make sure it’s a viable option. Business plans should be designed as a road map and it should be more useful to the business owner than any other person. In addition, it your business plan should be updated on a regular basis, at least once a year, to reflect new trends, products, strategies and other vital pieces of information.