Create a Business Plan by Answering 4 Simple Questions

By Greg Go on 28 July 2008 (Updated 7 November 2010) 24 comments

This post is a part of the Money Blog Network Group Writing Project focusing on advice for new entrepreneurs.

There are a lot of would be entrepreneurs out there with a great idea, but are afflicted with Business Plan Paralysis. Instead of shipping product, they're "working" on their plan, doing more "research", or "thinking about it".

I think the current literature on entrepreneurship overcomplicates things. Read the guides at Entrepreneur.com or bplans.com, and you run into 50 page documents with charts, spreadsheets, and financial projections accounting for every dime. And if these sources are to be believed, your business plan must also have serious sounding sections like Executive Summary, Competitive Analysis, and Financial Projections.

No wonder would be entrepreneurs stall at this step.

The good news is that you don't need that kind of plan right now.

Right now, all you need is an internal working plan to get you going. And to get that working plan, all you need to do is answer these four simple questions.

  1. What is your product or service?
  2. Who are your customers?
  3. When will things get done?
  4. When are bills due and when do you get paid?

1. What is your product or service?

What are customers going to give you money for?

Every company exists to create new value. That's what customers are paying for. What do you do to earn your income?

A few examples:

  • The service provider (barber, accountant, dry cleaner) creates value by providing a service you're willing to pay for.
     
  • A retailer (hardware store, car dealership, eBay seller, etc) creates value by connecting consumers and product manufacturers. Retailers buy inventory in bulk, split it up, showcase it, market it, teach customers how to use it, deal with returns, etc. For that work, they charge a markup on the product.
     
  • A blogger (or other website publisher) creates value by providing information and a forum for people to discuss stuff. If the content and community is great, there's a lot of value (lots of readers and page views). The more readers, the more the publisher can charge for advertising.

So back to the fundamental question. What do you do? What's the value your business is creating?

Equivalent sections in a fancy plan: Executive Summary, About Our Product/Service, Company Description

2. Who are your customers?

2a. Who's going to give you money? Who are you marketing to?

Write down all the potential customer profiles you think you will have. Your customers may come from multiple sources or have different needs.

For example, if you're opening a local brick & mortar store, you might have walk-in customers, regulars, and online customers.

For content publishers, you're serving your readers (every page view or feed subscription is a "sale"), but you're also serving advertisers or affiliated vendors (the people who actually give you money).

If you want to flesh this out even further, you can create customer profiles and even customer personas with names and personalities.

Marketing and selling to each type/group will require different strategies and tactics. The first step though, is to identify these groups.

2b. How many potential customers are there?

There's no point selling a product if there are only a handful of people interested. How big is the group of people who might potentially buy from you?

You can look at your competitors to get an idea of the market size.

eBay sellers can look at the number of feedback received in the last 1, 3, and 6 months. Bloggers (content publishers) can look at the number of page views and/or feed subscribers of other sites in their niche.

To determine a website's reach and traffic, you can also use third party trackers like Alexa, Compete, HitWise, Quantcast, or comScore.

If you need more extensive data, you can find a lot of information via Google. There are a lot of surveys and research papers available for free. You can also find teaser releases from research companies looking to sell you more in-depth analysis.

For analysis of public companies, check out Hoover's, LexisNexis, and S&P's industry surveys.

2c. Who are your competitors?

Imagine you're one of the customer types you described in answer 2b. Other than your new business, where else could these customers go to get the product/service?

Equivalent sections in a fancy plan: Market Analysis, Target Market, Primary (and Secondary) Markets, Marketing Strategy, Marketing Plan, Competitive Analysis/Advantage, Market Size

3. When will things get done?

Given the specific customers you describe above, how do you plan on reaching them? Will you buy ads, encourage referrals from existing customers, create a website?

This is when we get to the nitty-gritty. Write down concrete action steps and scheduled milestones.

3a. What does your company look like in 1, 3, and 5 years?

Answer this quickly. It's okay to "dream" a bit here. Three to five years is a long time away, and the point of this article is to get you past planning mode and into execution mode. So dream a little bit. Once you're actually executing, you'll have a better (more realistic) idea of what to aim for in 3 to 5 years.

3b. In the next 3, 6, 12 months, what are specific milestones you want to accomplish?

Be as specific as possible, without getting bogged down in too much detail. Otherwise, you'll be stuck in the dreaming mode for another 6 months instead of being in startup mode.

For milestones farther out, just jot down general goals. A common sticking point for new entrepreneurs is trying to plan for every possible scenario 12 or 24 months out. That's impossible unless you can see the future. (If you can, drop me an email. I've got work for you.)

3c. What are specific next steps you need accomplish to reach the first milestone? What can you do today?

For the first milestone (within 3 months), what are tasks that need to be done? For each task, what is the next action step? Who's responsibile for doing it? When will it be done?

The more specific and actionable your answers, the more likely you'll move this project along. Write down some actionable tasks you can knock out today, this week, and this month.

Equivalent sections in a fancy plan: Implementation Strategy, Milestones and Timeline, Exit Strategy

4. When are bills due and when do you get paid?

4a. How much money will it cost to make your product or provide your service?

Write down all the things you might have to pay for while launching or running your business.

Your expenses will fall into three categories: fixed expenses, variable expenses, and capital expenses.

Fixed expenses are the things you have to pay for every month, whether you make one sale or 10,000 sales. Hosting, rent, employees are examples of fixed costs. Add up your fixed expenses, and you have the baseline cost of running your business.

Variable expenses are tied to your sales volume. If you're moving product, what is your cost per item? These are the expenses tied to sales. Performance bonuses, sales commissions, pay-per-click advertising are examples.

Captial expenses are one time purchases you need to make. Web design, books, a computer are examples. Some of these expenses will come before you even open your doors. That is your startup costs.

Using this spreadsheet (XLS), plan your startup's first year expenses and income. What month will you break even? That is, when will you make back all the time and money you'll put into the company?

It's okay to guess. No one knows the future, and educated guesses based on the best available information is all we can do.

4b. How much do you have to charge to earn a profit?

For bloggers, how much does it cost you monthly to run your blog? In addition to the hard costs (hosting), don't forget to count the time involved. How much would you like to earn each month? That number plus your expenses is your target sales volume.

(Now that you have a hard dollar amount as a target, you might need to go back to your answers in question 3 to tweak your implementation strategy.)

Equivalent sections in a fancy plan: Financial Analysis, Financial Projections, Profit/Loss Statement, Income Statement, Cashflow Projections, Startup Costs

Go execute!

Now that you've brainstormed these answers, you probably have a jumbled mess of notes, references, and mini-speeches written down. That's certainly not a business plan you can hand to investors, but it is a business plan that you can start executing today.

If you don't know the answers to some of the questions, post in the comments or forums, and let the super smart Wise Bread community point you in the right direction.

Further Reading About Business Plans:

This post is a part of the Money Blog Network Group Writing Project focusing on advice for new entrepreneurs. Check out other great tips from other top personal finance bloggers:

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Guest's picture

Very good article. I really like this, because it gives everyone a basic starting point for their business. If done well, it can lead to a larger business plan when the time is needed. Too many people don't start their business because of the paralysis of analysis, they keep trying to prepare and learn and never get started.

Guest's picture
Dale Redmond

Good tips here. I might add to #3 (when will things get done) the following question: who's going to do the things that need to get done? A lot of companies have trouble out of the gate because their 5 year plan doesn't take hiring into account. If you plan for success you have to plan for growth.

Or, you just make dye for bears...

Guest's picture

Great post, Greg! Also, a quick questionnaire to see if you have the right mindset, personality, and business idea to be an entrepreneur right now is "Future Entrepreneurs Test" at http://shanelyang.com/2008/07/04/future-enterpreneurs-test/

Guest's picture

I so appreciate this post. My husband and I are going to be taking over the family business not to long from now, and with a drastic resizing/restructuring and a move, we really have needed to write a business plan and I've just been avoiding it. I grabbed my notebook and started writing down the answers as I read your post, and I've actually got the basics in place. Thanks for giving me a great starting point. It was a great help.

Guest's picture
Suz

Hey- great post! My husband is planning on opening a pet care business, and this is just the kind of advice he needs. One thing I'd add in - be conservative in your estimates for income and clients while over estimating the potential costs wherever possible. Things can always look great on paper, but it's much harder to make them work in real life.

Thanks again!
-Suz

Guest's picture
Greg

@Dale

Totally agree about assigning tasks to people. I see two issues here.

(1) We think we're superhuman and try to do everything ourselves. We get burned out after a few months or miss opportunities since we're always in fire fighting mode.

(2) Even if we don't think we're superhuman and have a team of help, nobody gets assigned responsibility for a task. If the "group" is responsible for it and we'll get to it "when we have time"... that's a guarantee it will never get done. You need ONE person in charge of a task or else it's doomed.

@Everyone else

This article wasn't meant to be a complete guide to writing a business plan, but I'm glad it has helped some of you to get started. Once we've got the fundamentals of our business down -- what our business does and who we're selling to -- then it makes all the other little decisions easier.

Good luck everyone!

If you guys are looking for inspiration, check out this article on 5 reasons why a recession is a good time to start a business.

Guest's picture
Guest

What about calculating the money needed to sustain the project until there's enough revenue to sustain itself?

Guest's picture
K. P.

Thank you for creating this little list. I,... am working on a product... but I will be done soon and have also dugg/favorited this story. I hope everyone else will do the same.

Guest's picture

Most small businesses start without a business plan. What a mistake. By using your post they will get a much better start.

Guest's picture

Great point! Too many entrepreneurs get bogged down in the tiny details when creating a business plan. It naturally helps to look at the larger picture, and to drill down to the fundamentals of your concept before you get started to ensure that you don't lose focus while you're working on your plan.

The only question I think you overlooked (although it ties in indirectly with a few of the questions you posed) is: what problem does your business solve in the market (or what need does your business fill)? It's the simplest, and perhaps most fundamental question every entrepreneur must be able to answer and express clearly in their business plan.

We also pontificated on your post at www.businessplan.com.

Guest's picture

Business planning is very much a verb. Let me echo that good business planning trumps a nice business plan any day... the heart of a good plan is great planning.

However, what I like even more is the spirit that you need a sound business model, else your best-researched plan is for naught.

Another way to map this is the business model (based roughly on Slywotzsky):
1) Value Proposition - what pain are you solving, what value are you providing... in THEIR eyes, not yours?
2) Vlue Delivery - how are you going to deliver that value? What are the mot critical tasks & who will do them? Can you do this cost-effectively?
3) Value Capture - how are you (and your investors) going to get paid? [we kinda forgot this piece during the infamous dot-com boom, LOL]

Gotta keep asking the hard questions - and tha usually requires a framework. I like the 3-part biz model above, but the 4-step list presented here is great too- thanks for sharing!
Norris Krueger

Guest's picture
Paul

Good summary to overcome paralysis - I've been using the NOLO book, "The Small Business Start-Up Kit" (borrowed from my library). I've found it very plainspoken and easy to use. The included CD has forms and spreadsheets related to book content. The Breakeven Analysis, Profit/Loss, and Startup Cost spreadsheets were extremely valuable.

I also recommend checking with your local Chamber of Commerce and Small Business Development organizations.

Guest's picture

Hi Greg,

Thanks so much for including our free resource site, bplans.com in your article.

We work hard to make sure and provide helpful information, articles, samples, suggestions and calculators for people starting or growing their business.

@ Norris

"Business planning is very much a verb. Let me echo that good business planning trumps a nice business plan any day... the heart of a good plan is great planning."

I couldn't agree more. This is advice that our president, Tim Berry, preaches a lot. Stop letting the "plan" keep you from planning.

Guest's picture

Greg, this post on the 4 Question Business Plan is outstanding.

For the past month, on a volunteer basis, I have been organizing information on business formation that can be shared during Global Entrepreneurship Week. This is the effort by more than 60 nations, occurring the week before Thanksgiving, to encourage young people to select entrepreneurship as their career path in life and to tackle some of the hardest challenges of life.

You have distilled the essence of the business plan. I think it will be a wonderful resource for young entrepreneurs. My plan is to post a link on my free directory that points readers here. By reading your post they can learn that the business plan is more than a tool to raise money. It is the tool to determine how they will really get things done and if they are sold on committing themselves to the plan. Great job.

Shallie Bey
Smarter Small Business Blog

Guest's picture

This is a good start to a business plan. I like the idea of using this to jump start the business idea. I would use this as a first pass to getting started. You will, however, want to go through a more detailed planning process. Both the planning process and the plan are important. It is not either/or. Further,planning is important, execution is important and being flexible is important. You must have all three of these at work in your business to be successful.

Guest's picture

Thank you so much for creating this list! I can't tell how useful a business model is like this for anyone considering starting a business. There are many great resources for startup businesses from local government but many times they are worded "odd" and are hard to follow. For a random blog post found on the internet, this one is pretty comprehensive & easy to read!

It makes me want to start another business!

Guest's picture

These are great tips but I'd like to add one more to add to your readers......Don't forget to revisit your business plan during these rough economical times.

My wife and I have been running our own business for years. And we had a business plan but what we forgot to include, in writing, was how to profit if a recession occurs. Without the steps in writing, it made it hard to make profits.

So we went back to our original plan, made edits, and added how to earn profits under such circumstances. Since doing so the profits have been flowing, again. I hope this tip benefits your readers as much as it benefited us!

Guest's picture

Agree with this 100%. You have to go back and see how you're executing on even the most basic business plan (and in any economy) as well as make adjustments based on past experience and new opportunities. A business plan should be a living thing, not a "write it and forget it" document.

Guest's picture
m65

There are a lot of would be entrepreneurs out there with a great idea, but are afflicted with Business Plan Paralysis. Instead of shipping product, they're "working" on their plan, doing more "research", or "thinking about it".

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Guest's picture

Thanks for the post! Marketing should be the foremost thing that a company is thinking about if it wants to succeed - otherwise they won't make any money!

Guest's picture

I think #2 really give short shrift to a big issue. Who gives you money (and for what,exactly) is complicated, and many people get it wrong. A page view or a free subscription is no way, no how a sale.

For example, if I publish content: Am I driving up the number of page views or subscriptions in order to sell advertising? (in that case, I'll have to focus on how to attract the people who will actually click on the advertising - and possibly convert, if my advertiser is measuring that many steps.) Is my goal to sell something to my readers themselves? And if so, is it the content itself, or is my goal to get people to buy other services? Do I want to up sell or cross sell current clients - or is the content delivery part of the service itself?

Guest's picture

The most crucial questions are:
1. determining what value you provide, and
2. determining your target customer.

Before you go off making projections, you absolutely need to TEST your business idea to make sure it's viable. There's no point making predictions and doing any additional planning until you've confirmed that people will give you cash for whatever value you're providing. If you don't have paying customers, you don't have a business.

I've seen people spend weeks, months, and even YEARS thinking & planning their business, without even testing their basic assumptions. Once you have paying customers, THEN you can plan a bit more, but still, you don't need to spend much time on it until you've grown to the point where you need to hire employees.

Greg Miliates
http://www.StartMyConsultingBusiness.com

Guest's picture
Kingleberry

Fantastic spot on article. Thank you.

Guest's picture
Kevin

Creating well thought-out road map for a company to follow is something that entrepreneurs do everyday, but to actually elaborate on those thoughts, along with the requisite research and analysis to back them up, into a written document is a complex task that can seem daunting. Business owners can create the document on their own or hire a professional to work with them. Either way the process of getting it done is important and rewarding. Best of luck to everyone.