Does an ecommerce company need a business plan?
Yes, almost any business can benefit from developing a business plan. While many companies prepare a plan solely to secure outside funding, a business plan can also help you focus on what you want your business to be in the future and provide a map of how to get there. In an industry that changes as quickly as ecommerce, a business plan can help a company respond and adapt to changing market conditions.
5 Reasons to Prepare a Business Plan
To secure financing. Whether you are looking for a loan or an equity investment, the organization that will provide the money wants to be assured that you know what you are doing and have a path to profit. Creating a business plan also helps you determine how much money you actually need. Unanticipated costs can sink a business so it is important to ask for enough funding to accommodate contingencies.
Most funding sources won’t consider a request without a formal business plan that explains the future potential of the business. Even friends or relatives will want to know that you have seriously thought about the business before they lend you money.
To avoid costly mistakes. Is your business idea feasible? Will people buy your product or service? A good business plan requires that you do some initial market research to determine if there really is a market. You will need to determine if your revenue model is sound and how long it will take for the company to become profitable. Another step is to perform a SWOT analysis — strengths, weaknesses, opportunities, threats — to observe the overall industry picture. I addressed this last month, in “SWOT Analysis for Ecommerce Companies.”
To set priorities. A well-written business plan can provide day-to-day operational guidance. It’s easy to get distracted with everyday details or emergencies when you have a new business.
To establish business milestones. The plan should clearly describe the long-term achievements that will be most important to the success of your business.
To create alignment among business owners. You may have partners in your business. Creating a business plan with input from all partners when the business is just starting ensures that everyone has the same vision about the endeavor. Disagreements among partners are major contributors to business failure.
Elements of a Good Business Plan
A thorough business plan includes the following.
- Review of market. An analysis of your competitors and what you will have to do better to get customers.
- Target market. Defines who the target market is, how big it is.
- Customers. Demonstrates an understanding of customer purchase behavior — why they buy, price sensitivity, product preferences.
- Marketing. A description of how you will promote your company,
- Earnings. Expected revenues and operating expenses for the first three years.
If you are presenting your plan to get funding, include the following financial documents.
- Summary of funding requirement. An outline indicating why you are applying for a loan and how much you need.
- Use of funds statement. Describes how you intend to use the funds. Back up your statement with supporting data.
- Budget. This shows cash inflow and outflow over a period of time. Cash flow statements show both how much and when cash must flow in and out of your business.
- Three-year Income projection. How do you know how to estimate future income? Use the pro forma cash flow statement for the first year’s figures and project the next according to economic and industry trends.
- Breakeven analysis. The break-even point is when a company’s expenses exactly match the sales or service volume. It can be expressed in total dollars or revenue exactly offset by total expenses.
Business Plans for Established Businesses
If your business is an ongoing concern, is there an upside to preparing a business plan? If you are in need of additional capital, you will certainly require one. In this case you will also need to provide performance metrics for your business’s past performance. This includes the following.
- Balance sheet. This shows the condition of the business as of a fixed date. It is a picture of your firm’s financial condition at a particular moment and will show you whether your financial position is strong or weak. It is usually done at the close of an accounting period, and contains assets, liabilities and net worth.
- Profit and loss statement. This document gives a picture of your business financial activity over a period of time.
- Financial summary. This covers financial information about your company from its establishment to the present.
If your business is stable and does not require outside financing you still might consider doing at least a review of your marketing approach, your priorities, and a SWOT analysis. Your competitors will always be trying to outperform you and there is no room for complacency in ecommerce.