Business Planning for Startups
Every business needs to have a plan. It is a roadmap to avoid possible risks and to chart a course toward success. Sound business planning orients new employees, documents financial and operational objectives investors, creditors, suppliers, and other stakeholders.
Elements of Business Planning
Business planning can take many forms and include detailed descriptions of go-to-market plans, key revenue metrics by which to judge success or failure, product development and deployment strategies to how you’ll onboard and retain customers.
From a financial strategy standpoint, here are some of the essential elements of business planning for startups and early-stage companies.
A Viable Product and Actual Customers
There is a journey to relevance that each startup must make that includes a product-market fit; a repeatable and profitable growth model; and the means to scale the model through effective marketing and sales.
For product-market fit, the company will need to clearly define the challenges they are helping customers overcome and/or the opportunities they are seizing via their product.
Along with a clear value proposition, there needs to be a number of actual customers who have (1) purchased the product and (2) are happy as evidenced by:
- product usage
- expanded usage
- low churn.
Capacity to Scale
After product-market fit is established, and some paying customers providing feedback are a reality, the startup must transition to a repeatable and profitable growth model that with the following characteristics:
Scaling the model takes proper application of sales talent, sales playbooks, and sales performance coaching.
This would include established, explicit sales goals.
In the case of a software or subscription-based company, demonstrating growing bookings is key, including:
- Starting ARR (Annual Recurring Revenue)
- New ARR Bookings
- Expansion ARR
- Churn ARR
- Net New ARR (New + Expansion – Churned Customers).
Note: You should not count bookings if it does not convert to cash within 90 days.
Soon, your business planning should include the ability for the executive team to track the following key metrics and report them to your Board:
- Last month’s P&L vs. original forecast, and YTD vs. forecast
- Last month’s P&L vs. prior month – dollars view
- Last month’s P&L vs. prior month – unit economics view (meaning, take your P&L, and divide everything by the unit that’s most important in your business. Could be square feet, available days for appointments, hours sold, etc.
- Meaningful YoY stats by product line, location, or some other way to give investors an idea of where growth is (or is not coming from)
- Headcount summary – by department, where are we against plan? For many startups, this is where cash either gets burned (hiring too fast) or revenue growth is thwarted (because you can’t find the right head of marketing and while this saves you money in the short run, it means you are not driving top line in the medium-term
- Rolling forecast vs. original projection – meaning, if I re-forecast the business for the rest of the year (which you should be doing on an almost constant basis), where am I going to end up
- Cash projection
The Business Plan
A business model can take many different forms, from brick and mortar retail locations to direct sales to Ecommerce and subscription models.
Whichever model you choose, should include your business plan and an operating plan.
Elements of the Business Plan
A startup business plan should be brief and easy to understand by people outside the company. A sound business plan should avoid jargon and very technical terminologies. Below are the essential elements to consider when preparing a business plan:
Clear Objective and Goals
The business plan should be able to give an overview of the business and briefly the goals and objectives of the company.
The perfect opportunity for any business to gain customers is through the presentation of a business startup. Include the vision and reasons behind putting-up the business to help readers identify who or what the company is. Introduce the business concept to clientele, including the mission and vision of the company. Included here are the core values, philosophy, goals, and business structure of the organization.
The business startup should be able to identify the company’s specific target market.
Who will be the company’s customers? Explain thoroughly the products and services, including information not included in the first part of the business plan. Present comprehensively what the company offers or sells and how it solves an existing problem of target customers. Conducting marketing research is very helpful in identifying the target market to determine if there is an opportunity for the business. Understanding the profiles, demographics, and behaviors of the market will help in the success of the company.
The marketing research will help any company in preparing a marketing plan to assist the business gain customer loyalty.
Identify the strengths, weaknesses, opportunities, and threats (SWOT) of the company. Try to describe all the product and service offerings in this section, focusing on the benefits it delivers to customers. Include all the after-sales services provided, such as warranty, delivery, technical support, refund, and training. Included here are the advertising strategies, including branding, to gain a competitive advantage.
The startup business plan must contain ways on how to identify the business above the others in its industry classification. Showcase why the customers should choose the company over other competitors offering the same product and service. Try to give customers reasons to patronize or switch to the company’s brand over other existing products. Price and technical specifications may also be included, with photos, describing these products and services.
Budget and Capitalization
How much does the company need for a business startup to stay afloat?
One of the main reasons business startup fails is due to running out of cash because of poor budgeting. The startup business plan must be able to present the details of the expenses involved in starting up the business. Get an accurate estimate of the startup expenses to be able to have enough capital for the company. If estimates cannot be determined, a little mark-up on calculations would not hurt. Presenting all the assumptions to support the estimated expenses should be included here. The readers should see in this section that the company has enough capital to start and run this business.
Financial Plan and Projections
Provide the financial projections for the company within the first five years of business operations.
Investors and prospective lenders meticulously read and examine this part of any startup business plan. Explain the assumptions behind the projected profit or loss based on the target market. The startup business plan should also present ideas for future business expansion for more accurate financial projections.
The break-even analysis will indicate if the business is feasible and will succeed or not.
Investors and lenders are interested to see the break-even analysis in any startup business plan. Present when and how the business will be able to break-even, providing analysis to the assumptions. This will show prospective stakeholders that management understands the company, and they know how to operate and handle it.
One of the challenging parts of preparing a business plan is the preparation of financial documents. These critical financial documents, which potential business partners and investors primarily look for, are as follows: