Guide to writing a business plan for lenders.
Writing a detailed business plan is an essential step for any entrepreneur. It’s not merely a document required by financiers, but a written roadmap that describes your business goals, how you will achieve them, why your venture is special, and how you will successfully manage inherent risks.
The rigorous process of developing the plan forces you to think through all facets of your business, significantly increasing your chances of success.
Lenders like Vancity require a business plan to confirm that you have researched and considered key operational areas, particularly marketing planning and financial planning. If you approach a lender without a plan, it suggests you have more work to do before we can talk about loans and financing. Your plan doesn’t have to be perfect before you talk to us, but it does help to have something written down.
As the owner and operator, it’s best to write your business plan yourself so that you can set the goals and implement the strategies effectively.
Getting started.
The initial sections of your business plan establish the foundational structure and identity of your venture. You can include what your business is, what it offers, a light history and relevant objectives and goals.
Ownership structure.
You should provide details about the ownership of your business. Typical categories include: sole proprietorship, partnership, incorporation, and cooperative.
Lenders need to know if other individuals are involved. If you have a business partnership, you should include a partnership agreement. If your business is incorporated, note any shareholders who own more than 25%. For cooperatives, describe how members will participate in governance and the share purchase structure.
Business sector and customers.
Describe your primary product or service, including any plans for future products. It’s helpful to categorize the nature of your business, such as retail, manufacturing, or service. You may also include the North American Industry Classification System (NAICS) code that best fits your primary business activity.
Finally, clearly note the types of customers you anticipate serving—are they primarily other businesses, consumers, or both?
Marketing plan.
A marketing plan is among the most important elements of your business plan. It’s important that you show us why you’re confident that there is a place for your products or services in the marketplace and you’ve researched and understand the key trends in your industry.
Your marketing plan should include your:
When it comes to marketing, we like to remind people there is no such thing as the general public. Just because a lot of people drink coffee doesn't mean all coffee drinkers are your target market. You need to be specific about the who and the why.
Remember to explain what you’re selling in everyday terms. This may seem obvious, but many plans leave lenders guessing what the product or service being sold is or why anyone would buy it.
Should I include market research?
Absolutely. Market research is the critical first step in developing an outstanding marketing plan. This research should answer: Who is your ideal customer? What is the market potential in your industry? And what is your realistic market share?
Sources of research can include:
Primary research: surveys, interviews, or focus groups. Talk to your perfect customer in-person on through online surveys. Give them your 30 second pitch, then ask them what would make them buy from you over your competition. Find out how much they’d be willing to pay and how often they’d buy.
Secondary research: You may find public databases, economic reports, or paid reports. Find out things like how many people like your target market live in your business area, their spending habits. Anything that helps you understand who you’re selling to can translate to business success for you.
How can I define my target market?
If you’re struggling to define your target market. Try answering these questions about your ideal customer:
- What are their demographic traits such as age or life stage and socioeconomic status
- What are their values, interests, and lifestyles?
- Where are they located?
- What are their purchasing patterns?
- What are their hobbies and recreational activities?
- What will motivate them to purchase your goods or services?
What’s market potential and market share?
Market potential is the size of the entire market for your product, calculated for a specific area or region for most small businesses.
Your market share is the realistic portion of that potential your business aims to serve. It can be difficult to realistically estimate the market share for a startup business, but it is still important to try.
How can I find my competitive advantage?
Spend special time and care to explain why your product is different or better than other options. Why will people choose you over your competition? Even if there is no business that does exactly what you do, you still must compete for your customers’ time and money.
Here's an approach for discovering your competitive advantage:
- Make a list of direct and indirect competitors, don’t stop at 3 or 5, at least find 10.
- Research your competition, make a list and figure out their “special ingredient.” What hooks people on their product, what makes people choose them?
- Then make a list of your “special3ingredients”. How do you differ across dimensions such as product features, customer service, delivery, quality, sourcing, contracts, pricing etc.
Remember, if your special ingredient is not clear to you, that’s a big red flag to investors and lenders.
Marketing strategy, tactics, and risk
Your marketing strategy is the long-term plan to reach customers, while tactics are the specific ways you execute the strategy (e.g., website, social media, signage, advertising). Ensure you have a clear message, potentially using a tagline or slogan, that communicates your competitive advantage.
Also describe industry trends (positive or negative) that could affect your business, such as regulatory, environmental, or technological changes. Additionally, address market risk, which is the possibility of lower-than-expected sales due to factors outside your control (e.g., changes in the Canadian dollar value or shifts in demand).
A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) of your own business, or even of a competitor, is helpful tool for assessing risks and how you’ll overcome them.
When it comes to marketing, we like to remind people there is no such thing as the general public. Just because a lot of people drink coffee doesn't mean all coffee drinkers are your target market. You need to be specific about the who and the why.
Your marketing plan should include a marketing budget that supports your chosen tactics. This budget should be listed as expenses in your financial cashflow forecast.
Operations plan.
The management and operations section details how you run the business and who will be responsible for success.
No business owner is an expert on everything. We want to see that you have assembled a great team or planned how you, if operating solo, will handle diverse operational areas.
Team, location, and production.
Describe the skills, experience, and education you and your management team bring. Highlight expertise in product/service, marketing and sales, and finance.
If you need outside help, specify areas where you require training or experts. Include information about any business mentor or adviser and their role. Successful business owners surround themselves with expert advisers.
When determining location, consider proximity to your target market, accessibility by car and transit, volume of foot traffic, and the terms of your lease agreement.
Do not rent a location before you have secured everything necessary to launch your business, including loans from investors like Vancity.
In the production process and delivery section, avoid assuming readers know your industry. Describe the steps involved in production, identify your suppliers, explain how you will scale production, address inventory needs, and detail how products or services will be delivered to clients.
Regulations and contingency planning.
Research and explain the regulatory requirements for your business, including necessary licenses or permits.
Contingency planning demonstrates readiness for the unexpected. Think about strategies to manage a temporary absence.
It helps to identify risks in these areas and how you’ll mitigate or respond them:
- Economic
- Legal
- Technological
- Social
- Political
- Environmental
All businesses face internal and external risks. Thinking through these risks (such as cash flow shortfall, excessive debt, competition, or rising costs) and developing mitigation strategies is an important part of planning. Pay special attention to financial, legal, and operational risks.
Financial plan.
The financial plan is where you prove your idea is realistic and sustainable. Financial planning requires making realistic assumptions and detailing every anticipated expense, from rent to inventory.
We invest the financial assets of our members. Your plan should show how you will generate enough revenue to cover expenses and pay back your loans. Be prepared to explain how you arrived at your calculations. We want to see how much money you need, not how much you want, and clearly detail the purpose of the funds (e.g., buying equipment, paying salaries).
Key areas.
Your financial plan should have:
Sales forecast
A careful, realistic estimate of anticipated monthly and annual sales. When calculating, ensure your production capacity supports your sales goal. Explain your calculation method and adjust for seasonality.
You may also want to talk about your pricing strategy and how you’ve considered costs, competitor pricing, standard industry markups and customer preferences.
How to make a sales forecast
Cashflow, cashflow, cashflow
We’d like to see a breakdown of expenditures and income over time in three different scenarios: cautious, realistic, and optimistic.
If this feels overwhelming, start by doing a breakeven analysis. This is a situation where your total sales revenue is equal to your total expenses. You may not breakeven in your first year which is where we then consider cashflow to see how you can cover ongoing expenses, such as those for a loan.
How to make cashflow projections
Your equity investment
We want to see you have enough confidence in your success to risk your own money before we’ll risk our members money. Share with us how much equity are you putting into your business.
We want to see your assumptions are supported by concrete evidence from the industry, your past sales or competitor sales. If you’ve been in business for 6 months, use bank and credit statements to create projections for your businesses’ future.
How to make a sales forecast.
Sales forecasting will be used in the “cash-in” section of your cashflow projection.
Sales forecasting for retail businesses.
This is fairly simple for businesses selling a product, just use this formula:
Number of monthly sales * average value of a sale * number of days open for business in an average month
= monthly forecasted sales
It’s important to show us not just the forecasted number but how you arrived at your assumptions. If you have a physical location, you may want to account for differences on weekends.
Sales forecasting for service businesses.
Similar to retail, you can use this formula:
Monthly average number of billable hours * hourly rate
= monthly forecasted sales
Sales forecasting for manufacturing and other non-retail product businesses.
Sales forecasting for manufacturing and non-retail product businesses is a little different because payment may be partially upfront, and upon receipt. You may also want to consider seasonal demand.
Start with:
Average # of monthly sales * average value of a sale
= average sales per month in $
However, when you use these projects in your cashflow projections, remember to account for when you are paid.
For example, if half of your invoices in a month are paid in the same month, and the other in another month, then in your cashflow for month 1, the cash-in is 50% of the calculated number using the formula above, and the other 50% is allocated to month 2. And so on for each month.
How to make cashflow projections.
Remember, we want to see 3 cashflow projections. One with a cautious outlook (this could be your worst-case scenario, like what if you make less sales than you anticipated?), realistic, and optimistic.
Even successful businesses sometimes have trouble with cash flow, meaning occasionally they can find themselves short on cash, which is why preparing a cash flow forecast is so important.
A cash flow forecast tracks how money moves in and out of a business on a month-to-month basis. Your cash flow forecast is made up of just 4 areas:
- Starting cash position
- Cash-in forecast
- Cash-out forecast
- Cash on-hand at end of month
A cashflow projection for a year looks like a table with a column for each month with rows for each of the 4 areas.
Here are examples of what the rows could be and what they mean for a manufacturing and business:
1. Starting cash position
This is a single row for your cash on-hand at the start of each month. It is the same amount as your cash-on hand at the end of the previous month. If it is your first year of operation, this will be 0.
2. Cash-in forecast
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Income from receivables
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This is for paid invoices or partial payments received that month. You may break it down by product or customize to reflect your business.
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Other income (specify)
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This could include refunds, one-time asset sales or rentals.
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Owner’s equity investment
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Include your own investment in your business such as savings.
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Loan proceeds
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Include the loan proceeds you anticipate receiving.
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Total cash-in
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The sum of above rows.
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Total cash available
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The sum of total cash-in and starting cash position.
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3. Cash-out forecast
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Fixed expenses, separate rows for:
- Rent / Lease
- Telephone / Internet
- Insurance
- Loan payments
- Other expenses (specify)
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Fixed expenses are those that are usually the same each month.
Add your own rows as needed.
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Variable expenses, separate rows for:
- Cost of goods sold
- One time purchases
- Payroll
- Advertising
- Accounting & legal
- Repairs & maintenance
- Other expenses (specify)
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Variable expenses are expected to change each month.
Add your own rows as needed.
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Total fixed and variable expenses
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The sum of the above.
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Owner’s withdrawal
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Be sure to include how much you hope to draw from your business.
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Total cash-out
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Total fixed and variable expenses and owner’s withdrawal.
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4. Cash on-hand (end of month)
This is a single row that takes your starting cash plus total cash-in minus total cash out. Use this as the starting cash position for the next month.
Conclusion: your living document.
The business plan should be treated as a living document, not just something brought out when financing is needed. It should be referenced regularly to ensure you are meeting your goals and staying on track. Vancity’s micro finance program assesses ambition, character, and determination, rather than solely focusing on credit history and net worth, but still requires the robust planning outlined above.
Work with our community partners to find further guidance on your business plan.
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