How to Write a Great Business Plan
by William A. Sahlman
Harvard Business Review
Which information belongs – and which doesn’t – may surprise you.
How to Write a Great
by William A. Sahlman
Few areas of business attract as much attention as new ventures, and few aspects of new-venture creation attract as much attention as the business plan. Countless books and articles in the popular press dissect the topic. A growing number of annual business-plan contests are springing up across the United States and, increasingly, in other countries. Both graduate and undergraduate schools devote entire courses to the subject. Indeed, judging by all the hoopla surrounding ...view middle of the document...
As every seasoned investor knows, financial projections for a new company – especially detailed, month-by-month projections that stretch out for more than a year – are an act of imagination. An entrepreneurial venture faces far too many unknowns to predict revenues, let alone profits. Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required to accomplish their objectives. Typically, they are wildly optimistic, padding their projections. Investors know about the padding effect and therefore discount the figures in business plans. These maHARVARD BUSINESS REVIEW July-August 1997
Copyright © 1997 by the President and Fellows of Harvard College. All rights reserved.
neuvers create a vicious circle of inaccuracy that benefits no one. Don’t misunderstand me: business plans should include some numbers. But those numbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought through the key drivers of the venture’s success or failure. In manufacturing, such a driver might be the yield on a production process; in magazine publishing, the anticipated renewal rate; or in software, the impact of using various distribution channels. The model should also address the break-even issue: At what level of sales does the business begin to make a profit? And even more important, When does cash flow turn positive? Without a doubt, these questions deserve a few pages in any business plan. Near the back. What goes at the front? What information does a good business plan contain? If you want to speak the language of investors – and also make sure you have asked yourself the right questions before setting out on the most daunting journey of a businessperson’s career–I recHARVARD BUSINESS REVIEW July-August 1997
ommend basing your business plan on the framework that follows. It does not provide the kind of “winning” formula touted by some current how-to books and software programs for entrepreneurs. Nor is it a guide to brain surgery. Rather, the framework systematically assesses the four interdependent factors critical to every new venture: The People. The men and women starting and running the venture, as well as the outside parties providing key services or important resources for it, such as its lawyers, accountants, and suppliers. The Opportunity. A profile of the business itself – what it will sell and to whom, whether the business can grow and how fast, what its economics are, who and what stand in the way of success. The Context. The big picture – the regulatory environment, interest rates, demographic trends, inflation, and the like – basically, factors that inevitably change but cannot be controlled by the entrepreneur. Risk and Reward. An assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond.
he accompanying article talks mainly about business plans in a familiar context, as...