Imagine if you are given a huge list of ingredients and asked to prepare an elaborate dish, and without a recipe your chances to complete it successfully would not be very good. In any business, the ingredients are the product, the employees, the inventory, customers, the suppliers, the software, etc., and the recipe is the strategy by which the ingredients will be combined to execute the overall plan of the business. If you do not have the right recipe you will have a terrible time trying to make the ingredients into anything other than a mess, so let’s look at how to create a business plan for the business you are planning to buy.

In order to provide context to the scope of your business plan, you should identify the time period for which the plan will focused, be it one year, two years, three or more, this time constraint is necessary in order to provide context for your thinking and decision-making.

A business plan is, at heart, a story that explains how a business works and when a business plan doesn’t work, it’s because it fails either the narrative test or the numbers test including “does the story makes sense?”, and “does the story add up?”.

A business plan is therefore usually broken down into these two test sections which include a written section typically called the plan narrative, and a numbers section typically referred to as the financial projections. The projections are simply a numerical representation of the business itself and its marketing strategy that is presented in the plan narrative and the two sections must be completely entwined.

The narrative of a business plan is usually broken down into three major sections including the business description section, the marketing strategy section, and the management and operations section, so let’s look at each of the sections in turn and illustrate what types of information go into each section.

The business description section simply describes attributes about the business itself and should include the mission (the purpose), the vision (the big dream with a deadline), industry characteristics and trends, and a general description of the business including the background of the business, your current situation, and your future plans, goals, and objectives.

The market strategy section documents all of the activities surrounding the most important function of your business which is marketing, and it addresses the questions of what you sell and how you sell it. If you are interested in creating an organization that is built to last it’s important not to confuse what you sell with who you are, and as your business grows, you will find that the products it sells in their ways in which it sells them must change over time, and many times to a great extent.

The market strategy of your plan should include a customer description, a product and service description, a competitive analysis, a positioning strategy (your place in the customer’s mind), a pricing strategy, advertising, media, and public relations strategy, and a distribution and location strategy.

The management and operations section of your plan described who will manage the business and how they will do so and it also describes how you produced the products you sell or the services that you deliver, and this section basically details how the day to day operations of the business are conducted.

The management and operations section of your plan should include a management team listing including their education, background, and responsibilities, the ownership structure of the business (sole proprietor ship, partnership, s corporation, LLC, etc.), a strategic partner and supplier discussion, a human capital and personnel needs discussion, insurance and risk management discussion, and a facilities overview.

As a final discussion of your management and operations segment, you should demonstrate the risk factors involved and this means addressing questions about market risk, financial risk, management risk, and technological risk, as most audiences who read a business plan want to see evidence that an entrepreneur recognizes the risk factors facing the business and has taken steps to control them.

As stated earlier, the financial projections section of the plan should be thought of as simply quantifying the effects of what was presented in the plan narrative and although the projections are concerned with the future don’t think of the projections as merely a prediction, instead, the projections should be thought of as goal-setting with respect to revenues and expenses. Remember, we cannot predict the future and this is precisely why planning is necessary, since we can make plans, set expectations, and goals.

Financial projections should include at least a listing of required funds and their uses, a sales forecast (at least monthly for the first year and quarterly for additional years), a variable cost of sales analysis, a fixed expense operating budget, a projected profit and loss statement, and possibly a projected cash flow statement, a balance sheet, and any breakeven analysis.

You should detail exactly how much money you need to make your plan a reality and your listing should break these costs down into Fixed Assets and Working Capital, as fixed assets are property that usually has some sort of long-term value, and working capital is money that will be used to finance the short term operations of the business.

For your sales forecast don’t let the fear of prediction stop you from arriving at a projected revenue figure, since every business sales units of something, whether it be hours, projects, products, services, etc., simply set goals for the numbers of units you believe you can sell taking into account any seasonality factors, and finally, multiply these units by your average established a prices and the result is your sales forecast in dollars. Each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can be more important than the final numbers.

Variable costs are those cost incurred every time a sale is made and they vary with sales, and they are the direct cost associated with producing or selling your products and services. Variable cost per unit include the cost of goods themselves (for retailers), any direct labor associated with creating the product, and any materials that go into the product itself.

Fixed expenses do not vary with sales and are usually tied to some contracts with arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing these amounts and when they occur.

A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profit potential of the business.

In its simplest form, most P&L Statements adhere to the format including Projected Revenue, minus Variable Cost of Sales, equals Gross Margin, minus Fixed Operating Expenses, and equals Net Profit or Loss, and developing a comprehensive set of financial projections is an art to itself, so the important point is your projections should be simply stated. With spreadsheets today, it is possible to crank out a forest of paper with many different scenarios ultimately resulting in nothing for better decision-making (the true purpose of projections in the first place), but only confusion.