Freelancers and entrepreneurs who are just starting out often scoff at the idea of a business plan.
What, me? I know what I’m doing. I don’t need no business plan.
And this is exactly why those individuals cash in their chips at the end of six months and go back to being employees.
It’s not always about money
Freelancers and entrepreneurs often equate having a business plan with raising capital or going in front of venture capitalists. However, having a business plan is about much more than just raising money.
You wouldn’t build a house without first generating a blueprint. You wouldn’t drive to an unknown destination without first consulting a map (or GPS). So, why would you run a freelance business without a business plan?
Part of the reason might be that freelancers don’t understand all the functions that a properly outlined business plan serves. Here are just a few of those functions.
To see the forest through the trees.
A business plan allows you to see the big picture regarding your business and helps you formulate strategies that keep it moving (and growing). Within a business plan, you include what you want your business to focus on, what advantages you offer your customers (i.e., value proposition), and who your competitors are.
To anticipate the future.
A business plan helps you plan for the future, including when you’ll hire other freelancers, expand your operations, take on additional projects- or maybe even sell your business.
To communicate with others.
More than likely, you are not starting your business venture in a vacuum and may already have a few partners or investors involved. To make sure all stakeholders know and agree with the company game plan, you need a business plan.
To assess finances.
What kind of profit margins are you looking for and how much of your own cash are you willing to pony up? What percentage of revenue can day-to-day operations eat up before the business stops being profitable? A business plan answers these questions and lays down the financial ground rules.
In summary, you need a business plan because two big factors stand between you and your business success: ignorance and emotions. In terms of ignorance, there are many things you just don’t know as a starting entrepreneur- and a business plan helps identify these areas. On the flip side, having a business plan helps keep your emotions in check; for example, when you get all fired up about investing half your company’s cash in some new-fangled iPhone app, your business plan’s objectives say “no way” and take you back to reality.
What are the pieces of a business plan?
Company Description- Think of this section as an extended elevator pitch for your company. This is where you describe your business and how it satisfies current marketplace needs. You also mention your target customers and how your company’s products satisfy their needs. Don’t forget to highlight the competitive advantages your products and services offer as opposed to those of your competitors.
Market Analysis- This is a rather meaty section of your business plan and should be written only after you’ve had a chance to do extensive research. In this section, you describe your industry in more detail, including its past as well as projected growth. Major and specific customer groups are listed as well as their needs, buying cycles, etc. Also, assuming you win over these customer groups, how much market share does that translate to when compared to your entire industry? How much money can, at least in theory, be made? Finally, what kind of profit margins are you going to shoot for, and will there be some wiggle room for discounts and sales?
Organization and Management- This is where you introduce your partners and describe each person’s role, work history and relevant experience. You also discuss how each partner gets compensated and whether there is the possibility of advancement in the business. As for the company itself, you provide information on its incorporation status (e.g., LLC), number of owners and their ownership percentage, as well as how each owner is compensated.
Products and Services- Here’s where you– yep, talk about your products and services. What if you only have a prototype, or just a product idea? That’s fine too as long as you can describe the product, what unique market advantage it offers, the development stage that it’s in, and any intellectual property (e.g., patents) currently associated with it. If you are engaging in product development work, mention that here as well.
Marketing and Sales Strategy- How you plan to sell your product and grow your business are the main topics covered in this section. Marketing strategy may include hiring salespeople or recruiting distributors or retailers. Growth strategies may include franchising, acquisition or internal growth (i.e., hiring employees). Customer analysis is of utmost importance; be sure to describe how you plan to attract and retain customers and what volume of sales will make your business profitable.
Funding Request- If you want to raise capital, pay attention to this section. Here’s where you write about how much money it takes to run your business and what financial goals are in your company’s future. Also, if you receive additional funding, how do you plan to use it? Finally, what are your financial strategies should your company be bought or sold? Interested investors who are about to plunk down their cash will definitely want to know the answer to that last question, because they will eventually want their investment returned.
Financial Projections- In this section, you provide past financial data, including your income statements, balance sheets and cash flow statements. You also provide prospective financial data; in other words, where do you expect your business to be in 3-5 years? Making accurate financial projections is critical if you hope to secure funding.
Executive Summary- This section is typically included at the very beginning of a business plan. However, because the executive summary includes summaries of your company mission statement, history, financial health, market analysis and future plans, it should really be written last. Don’t forget to mention your company’s goals (besides making lots of money); goals help draw in future partners and investors.
Where to get started
Do all these business plan sections and questions sound a bit intimidating to you? If you need a little help getting started, the U.S. Small Business Administration offers lots of advice as well as a business plan tool that you can use to draft your own personal business plan.