Plans are worthless. Planning is essential.
Dwight D. Eisenhower
How to write a business plan
When General Dwight Eisenhower said “Plans are worthless.” he was right, they are guesswork of the future and as such will never be correct. He was also restating an age old military truth, written down by a Prussian General in the 1800s that “no plan survives first contact with the enemy”. No matter how beautiful your plan, no matter how careful you are, the enemy may not do what you want, expect or foresaw, and even if you could, once the chaos of battle begins, you won’t be able to keep checking it. As the boxer Mike Tyson famously rephrased “Everyone has a plan, until they get punched in the face”.
But Eisenhower did not stop his wisdom there, his thought continued to include a valuable but perhaps counter-logical follow on step: “Planning is essential”. How can that make sense? How can planning be essential if all plans are worthless?
For an explanation lets turn to two other great thinkers on the subject. Thomas Edison wrote “Good fortune is what happens when opportunity meets with planning.” If you are ready for a situation and it happens, then you can take advantage of it. If you don’t plan for anything, you’re not alert, not proactive, not ready. Success can not come from being inactive till the point of decision.
Luck and random chance is the only thing that is guaranteed, with planning and foresight you can take advantage of things when luck goes your way. With preparedness you become lucky.
Abraham Lincoln once said “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Preparedness means getting everything in order, having the tools ready for the job, even if you don’t know what they job is yet. Lincoln doesn’t know the size or the type of tree, but he does know he needs a good axe to do it. He knows what needs to be ready or he’ll never have a chance of succeeding.
The rigour and insight undertaken in order to predict the future is more important than the prediction itself.
The single biggest problem in communication is the illusion that it has taken place.
George Bernard Shaw
The WHAT, WHY and HOW of writing business plans.
Writing a business plan is a daunting experience, but it’s actually really simple. I’ve written or assessed thousands of business plans, I used to write them professionally for startup company’s and have raised millions of pounds through the plans I’ve written. The key to a good business plan is three things…
Every business plan, no matter who it is written for or how long it is, tries to answer three critical questions: what is the idea, why is it needed and how will you do it? If you can write a story that answers these questions you should be able to make a business case for anyone, senior management in your organisation, outside investors or even the humble bank manager.
(Actually there is a 4th key thing and it’s probably the most important… the Who. Who are you and why are you the right person / team for this opportunity… if you don’t have a good ‘who’, then you probably shouldn’t be doing this anyway. For students being forced to write business plans as part of your degree, I deliberately ignore the Who part of any business assignment because you don’t have a choice!)
Business plans are not right or wrong, they are believable or not believable.
WHAT
The explanation of the idea.
Yes I know it’s fashionable to “start with why” and I absolutely love Simon’s ideas here but that doesn’t necessarily mean rearranging your business plan to match this makes sense, especially if the sections are lengthy and detailed and unless the reader knows what the point of all this is they’ll get easily lost. So briefly introducing the need (a succinct intro to your later detailed Why section) is a great way of launching the What.
“People don’t buy what you do, they buy why you do it.”
The What should be the simplest part of the task. Describe and explain what you are offering (or want to offer). What are you selling, doing, planning. Some of this will need context, history or background and you might think that you’re taking information away from the other sections… that’s fine. There will be overlap between all of these sections and it’s helpful to explain The important bit is having a clear logical story and narrative that carries the reader through your whole plan. The other sections are all deep in the gritty detail of their areas, this section however is unique because it’s deep on What but also light on Why and How.
WHY
The explanation of the opportunity, the need and the market.
Why are you doing this? Why are you putting all this effort into your idea? Why should anyone care? What’s the opportunity and what’s it worth? It must be worth something if you’re going to all this effort! Who else is doing it? What’s interesting about them and how they do it? What best defines and categorises your target customer?… The list goes on.
Not all of it is relevant to every business plan, but you’re trying to conduct rigorous and thorough research into the state of the market as it is now and what it could be like in the future. Some things to consider:
The need & the pain - Why would anyone want what you’re offering, what problem are you solving? You’ll have touched on this in the What section previously, but this is your opportunity to really explore it in depth.
Market & Opportunity size - How much is solving this problem worth? (not just some lofty global figure, be specific, be local, make it believable and relatable to what you’re capable of achieving).
All things customer related - What they want, need and pains. It might also be helpful to segment them into clusters. Segmentation is done so you can better focus your activities to groups of customers that want similar things. Being old, a student, a young professional, ‘soccer mum’, blah blah blah… usually makes no meaningful difference. Instead segment them by preference, taste, requirements & outcomes.
All things competition related - Who are they, can they segmented, how do they operate, where is your gap or opportunity? Are there any alternatives, non-direct competition that might influence the opportunity or how you pursue it?
The $4.4bn investment after a 12 minute walk
A word of warning… Lots of business plans are light on details, light on rigour and light on evidence. Lots of business plans, especially for silicon valley start-ups seem to rely on founder passion and charisma to get what they want. Whilst this may be the case, it’s hardly something you can trust in.
“There are two types of forecasters, those that don’t know and those that don’t know they don’t know.”
- John Galbraith
Good thorough research and a well crafted story is always the best way to make a convincing argument. Don’t be the person who doesn’t know they don’t know.
None of this is meant to be easy, anybody who thinks it’s easy is stupid.
Charlie Munger [Half of the double act that is the world’s most successful investment partnership]
HOW
The explanation of the method.
This is the tricky bit, and it requires the most head scratching. How are you actually going to achieve your plans? You’ve already explained what the idea is and why now is the right time for it. So what the reader wants to see is how you’re going to do it. This is not the time for fluffy business terms that don’t mean anything:
“We’ll pursue an aggressive market penetration strategy with social media influencers [blah blah blah no details given, just lots of business jargon]”
Which influencers and why? Which social media platform and why? Do we even need a social media presence? Just because everyone is doing something doesn’t mean you should be too. A local business does not need thousands of followers from around the world if none of them can access your product or buy your goods. Everything costs time and money, so focus on the ones most relevant to your business.
Be as specific as you can be…
“Our advertising approach will rely on Instagram influencers like X, Y and Z. They promote and share our values of X, Y and Z in everything that they do and speak directly to our target ideal audience of X, Y and Z. The cost of a 2 month campaign will cost X and we’ll operate a rolling system of continuous A-B testing with different influencers to see which advert is the most effective. Switching designs each week. See example adverts below. [etc…]”
Try and give as much information as you can. Remember business plans are not about being right or not, you’re guessing the future so you can’t be right. But you can be credible, believable and show that you’ve done your homework.
Fashionable vs Sensible
Just because everyone is doing something does not mean it’s the best approach. Using Tiktok influencers for your B2B industrial products line might be an odd choice, even having a social media presence may be unnecessary. Remember everything has a cost or time commitment to it. If that Instagram page is not returning on its investment then why are you doing it?
Business Plans vs Business Cases
The traditional business plan is the sort of document a fresh eyed budding entrepreneur will have slaved over to try and raise money from investors to make their dream a reality. The classic startup story. These are external facing propositions, sent out to the world to try and find investment.
There are also internal facing business ‘cases’ where a team within an organisation are writing a business plan not for external investors but for management to consider and hopefully approve. As a result it’s slightly different in it’s style, wording and some of the contents, it’s very likely to be more of a commercial feasibility review rather than a positive sounding investor document. But the idea is still the same, you need to clearly explain what you’re hoping to do, why and how. The two key differences might be a consideration of more alternative plans (we think plan A is best, but we could do plan B or C if needed) depending on constraints and budgets and the financial forecasts you include.
Forecasts tell you a great deal about the forecaster; they tell you nothing about the future.
Warren Buffett [The other half of the world’s most successful investment partnership]
Financial Forecasts
For traditional business plans there are three financial statements that are usually always expected:
Income Statement (also known as a Profit & Loss)
Cashflow Forecast
Balance Sheet
For internal business cases, the income statement or balance sheet may not be relevant, especially if you’re trying to make an investment case for an efficiency improvement, health and safety or production change. If it’s something that won’t directly affect sales and the customer than these financial statements may not make sense.
So instead you might want to look at a detailed Cost / Benefit Analysis (or Return on Investment) of some sort, and establishing Key Performance Indicators (KPIs) against which the success or failure of this case can be judged.
The Cashflow also becomes slightly different too, transforming into a detailed implementation plan, fully costed with time frames and staffing implications.
Whatever your format, whatever your style, whatever the opportunity… the two most important elements that supersede anything else in this section of your planning are: Creating a robustly defendable sales price and creating a robustly defendable sales flow (volume and time). Much of the research to generate these will come from you WHY material and the rest of the HOW is there to support your efforts for achieving these two. In many cases sales profit is also (obviously) important, but not always, and costs are determined by the possibly not quite decided final form of the offering. Sales price on the other hand is what the customer can tolerate and is more valuable to know as it will determine the choice of offering.
Income Statements
Gross Profit = Revenue – Costs of Goods/Services
Net Profit = Gross Profit – Other Expenses
Revenue is the amount of money you earn from selling whatever it is that you sell.
Cost of Goods sold (COGs) or Cost of Sales, are part of the expenses category, but are specific to the direct costs of materials and/or labour associated with what you sell.
Expenses are the outflow of cash or assets that your business spends for marketing, promotion, advertising, general administrative tasks, and so on.
What’s left is you ‘Bottom Line’
Here’s an example Income Statement, taken from a Tesla’s recent financial filings. This is all historic rather than predicting the future. But it’s still interesting to see… so in summary: Tesla made $31.5bn in selling cars (presumably) but those products cost $24.9bn to make. They also spent $1.491bn on R&D whilst $3.145bn on selling, general and administrative costs. So they made a profit of $1.99bn and then start paying tax (as tax is only paid on profits rather than income).
Cashflow Forecasts
“Turnover is vanity, profit is sanity but cash is reality”. The world’s most profitable company could go bankrupt if they don’t have cash in the bank or can’t quickly raise cash to pay a bill. The reality of business is that getting your cashflow wrong can kill a good business.
Cashflows should be considered at a detailed granular level at the start and then become annually for later. So for example you might consider a weekly or monthly cashflow forecast for year 1 and then a yearly snapshot for any following years in your forecast.
A forecast consists of three elements:
Operating activities: These are activities that are essential for day to day operations. These include cash from inventory, net income and accounts receivable. For example, the amount of money you bring in for selling goods or a service in a day or week would be categorised as operating activities.
Investing activities: These are activities used to grow the business, such as acquiring other companies and real estate.
Financing activities: Finally, these are activities the company undertakes to obtain investor financing.
Continuing the example of Tesla’s finances, we can see from their annual cashflow statement, which is a snapshot in time at a specific and consistent time each year (in this case). You should be able to see that some of these numbers are replicated in the previous income statement.
Note: There used to be an accounting convention not to use negative numbers, instead you’d use brackets, so -$1bn would be written like ($1bn) also often in a red font colour. It seems these days that more and more business accounts do use negative numbers, so I don’t mind which is used.
Balance Sheets
Assets = Liabilities + Equity
Assets are items that your company owns that can produce future economic benefits, such as cash and inventory
Liabilities are your company’s obligations and include short term debts along with taxes payable
Equity is what you are worth from a cost perspective. Anything left over after subtracting liabilities from assets belongs to the owner(s) of the company. It represents the value of the owner’s investment into the business…
Not so relevant for ‘startups’ as there is no value in potential.
From this balance sheet we can zoom down to the bottom and see that from a ‘cost perspective’ Tesla is worth $23bn… but the market (today) thinks Tesla is worth around $700bn. So this is why the balance sheet is a useful summary but for high value, high growth startups the valuation does not account for future earnings potential.
Excel Spreadsheets and Financial Forecasts
Beware the danger of excel and showing numbers to 9 decimal places! Just because excel can show it, doesn’t mean you should. A guess of what you’re going to spend on advertising in 5 years time is not ‘more correct’ if you show it to 9 decimal places, or frankly even 2 decimal places. It’s a total guess, how can you possibly know? So don’t damage your credibility by not realising this and instead round your numbers up to the nearest 10, 100, 1000 or even 1,000,000 if appropriate.
Tesla’s numbers above are precise because these are historic, known numbers. Showing the future is a different matter. Be precise if you can do so believably… year 1, for everything else round them up.
When communicating forecasts, make sure you annotate the spreadsheets, explain the trends, why is this going up, down or staying the same? Why is there a spike in costs or revenue here? Why is the growth rate expected to be this etc… I’m sure you’ll have covered all this in the body of your reports, but remind the reader why things are the way they are.
A quick word about when and how to use appendices…
If it's not important for the reader to know then don't include it anywhere.
If it's important, but spoils the flow of the story (thus making it harder to understand), then put out the way in an appendix.
A business document is not a PhD thesis, the audience wants a message that is quick to digest, they don’t want an encyclopaedia. So you don’t need to include absolutely everything you’ve found. Part of the challenge is how you craft all this work into a succinct and concise short read. It’s not easier, it’s different.
Everyone has a plan, until they get punched in the face.
Mike Tyson
A final word on business plans and business cases. The reality is that many entrepreneurs and business managers do not write or do not write good business plans. Another painful reality is that most business plans are never read or only read once and then thrown away, crafted for a specific event, meeting or investment discussion and then thrown away.
“No plan of operations extends with certainty beyond the first encounter with the enemy's main strength.”
- German Field Marshal Moltke
Or as Mike Tyson rephrased… “Everyone has a plan, until they get punched in the face.”
All forecasts are guesses, once things actually start it’s more likely than not to be wrong. “No plan survives first contact with the enemy” is a famous military doctrine meaning that nothing ever goes to plan when you actually start.
But! Done properly and with proper thought and care, the act of writing a business plan is an essential leadership, management and planning activity. As Eisenhower famously put it, the plan itself is not important, but the act of planning is essential.