Business Plan for Software Company
Written by Dave Lavinsky
Software Company Business Plan
Over the past 20+ years, we have helped over 500 entrepreneurs and business owners create business plans to start and grow their software companies.
If you’re unfamiliar with creating a software company business plan, you may think creating one will be a time-consuming and frustrating process. For most entrepreneurs it is, but for you, it won’t be since we’re here to help. We have the experience, resources, and knowledge to help you create a great business plan.
In this article, you will learn some background information on why business planning is important. Then, you will learn how to write a software company business plan step-by-step so you can create your plan today.
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What is a Software Company Business Plan?
A business plan provides a snapshot of your software company as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategies for reaching them. It also includes market research to support your plans.
Why You Need a Business Plan for a Software Company
If you’re looking to start a software company or grow your existing software company, you need a business plan. A business plan will help you raise funding, if needed, and plan out the growth of your software company to improve your chances of success. Your software company business plan is a living document that should be updated annually as your company grows and changes.
Sources of Funding for Software Companies
With regards to funding, the main sources of funding for a software company are personal savings, credit cards, bank loans, and angel investors. When it comes to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to ensure that your financials are reasonable, but they will also want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business. Personal savings and bank loans are the most common funding paths for software companies.
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How to Write a Business Plan for a Software Company
If you want to start a software company or expand your current one, you need a business plan. The guide below details the necessary information for how to write each essential component of your software company business plan.
Executive Summary
Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.
The goal of your executive summary is to quickly engage the reader. Explain to them the kind of software company you are running and the status. For example, are you a startup, do you have a software company that you would like to grow, or are you operating a chain of software companies?
Next, provide an overview of each of the subsequent sections of your plan.
- Give a brief overview of the software company industry.
- Discuss the type of software company you are operating.
- Detail your direct competitors. Give an overview of your target customers.
- Provide a snapshot of your marketing strategy. Identify the key members of your team.
- Offer an overview of your financial plan.
Company Overview
In your company overview, you will detail the type of software company you are operating.
For example, you might specialize in one of the following types of software companies:
- Open source: An open source software company is one that produces a code base that is free for any entity that desires to use it. The value of this structure is found in the auxiliary services and customizations that are provided to clients. Examples of highly-profitable open source software companies include Linux and Red Hat.
- Client-specific: As cloud computing continues to grow in popularity, more companies look to specific software programs to drive their businesses further into high-growth positions. Examples of client-specific software companies include Oracle and SAP.
- Programming services: Software companies that provide programming are essential to the tech industry. Examples include Microsoft and ADP, well-known giant software companies.
- System services: Software companies have become highly successful, as they’ve perfected the art of creating systems for personal computers and the growing field of tablets and other personal devices. Examples of software companies that focus on systems include Intuit and Adobe.
In addition to explaining the type of software company business you will operate, the company overview needs to provide background on the business.
Include answers to questions such as:
- When and why did you start the business?
- What milestones have you achieved to date? Milestones could include the number of software programs created, the number of specialized SaaS services created, or reaching X number of clients served, etc.
- Your legal business Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.
Industry Analysis
In your industry or market analysis, you need to provide an overview of the software company industry. While this may seem unnecessary, it serves multiple purposes.
First, researching the software company industry educates you. It helps you understand the market in which you are operating.
Secondly, market research can improve your marketing strategy, particularly if your analysis identifies market trends.
The third reason is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.
The following questions should be answered in the industry analysis section of your software company business plan:
- How big is the software company industry (in dollars)?
- Is the market declining or increasing?
- Who are the key competitors in the market?
- Who are the key suppliers in the market?
- What trends are affecting the industry?
- What is the industry’s growth forecast over the next 5 – 10 years?
- What is the relevant market size? That is, how big is the potential target market for your software company business? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.
Customer Analysis
The customer analysis section of your software company business plan must detail the customers you serve and/or expect to serve.
The following are examples of customer segments: start-up tech companies, companies in need of CRM software, research and development companies, and cloud-computing corporations.
As you can imagine, the customer segment(s) you choose will have a great impact on the type of software company business you operate. Clearly, start-up tech companies would respond to different marketing promotions than major cloud-computing corporations, for example.
Try to break out your target customers in terms of their demographic and industry profiles. With regard to demographics, include a discussion of the locations, type of services or programming needed and revenue potential of the client companies you seek to serve.
Psychographic profiles explain the wants and needs of your target clients within the companies you will target. The more you can recognize and define these needs, the better you will do in attracting and retaining your customers.
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Competitive Analysis
Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.
Direct competitors are other software company businesses.
Indirect competitors are other options that customers have to purchase from that aren’t directly competing with your product or service. This includes generic software outlets, private individual providers, and computer servicing companies.You need to mention direct competition, as well.
For each direct competitor, provide an overview of their business and document their strengths and weaknesses. Unless you once worked at your competitors’ businesses, it will be impossible to know everything about them. But you should be able to find out key things about them such as
- What types of customers do they serve?
- What type of software company are they?
- What is their pricing (premium, low, etc.)?
- What are they good at?
- What are their weaknesses?
With regard to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.
The final part of your competitive analysis section is to document your areas of competitive advantage. For example:
- Will you provide options for the customized software?
- Will you offer products or services that your competition doesn’t?
- Will you provide better customer service?
- Will you offer bundled pricing?
Think about ways you will outperform your competition and document them in this section of your plan.
Marketing Plan
Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For a software company business plan, your marketing strategy should include the following:
Product : In the product section, you should reiterate the type of software company that you documented in your company overview. Then, detail the specific products or services you will be offering. For example, will you provide open source programming, SaaS products, or software to support Microsoft systems?
Price : Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of your plan, you are presenting the products and/or services you offer and their prices.
Place : Place refers to the site of your software company. Document where your company is situated and mention how the site will impact your success. For example, is your software company located in a professional technology park, a standalone building or is it purely online? , Discuss how your site might be the ideal location for your customers.
Promotions : The final part of your software company marketing plan is where you will document how you will drive potential customers to your location(s). The following are some promotional methods you might consider:
- Quarterly press releases to industry-wide interest groups
- Engage in social media mining and marketing
- Offer informative blogs; become a speaker in seminars
- Create a strong presence at tech trade shows and conferences
- Give expert opinions on tech social media platforms
- Improve the SEO (search engine optimization) on your website for targeted keywords
Operations Plan
While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.
Everyday short-term processes include all of the tasks involved in running your software company, including meeting with clients, planning new software development, training personnel, and running administrative services.
Long-term goals are the milestones you hope to achieve. These could include the dates when you expect to sign your Xth contract, or when you hope to reach $X in revenue. It could also be when you expect to expand your software company business to a new city.
Management Team
To demonstrate your software company’s potential to succeed, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company.
Ideally, you and/or your team members have direct experience in managing a software company. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.
If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act as mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in managing a software company or successfully running a small technology development firm.
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Financial Plan
Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance sheet, and cash flow statements.
Income Statement
An income statement is more commonly called a Profit and Loss statement or P&L. It shows your revenue and then subtracts your costs to show whether you turned a profit or not.
In developing your income statement, you need to devise assumptions. For example, will you introduce a new software program on a yearly basis, or will you customize software for return clients? And will sales grow by 2% or 10% per year? As you can imagine, your choice of assumptions will greatly impact the financial forecasts for your business. As much as possible, conduct research to try to root your assumptions in reality.
Balance Sheets
Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your software company, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a lender writes you a check for $50,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.
Cash Flow Statement
Your cash flow statement will help determine how much money you need to start or grow your business, and ensure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit, but run out of money and go bankrupt.
When creating your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing a software company:
- Cost of computer and software equipment
- Payroll or salaries paid to staff
- Business insurance
- Other start-up expenses (if you’re a new business) like legal expenses, permits, furnishings and office supplies
Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include the patents you own on software programs or a list of clients on monthly retainers.
Writing a business plan for your software company is a worthwhile endeavor. If you follow the template above, by the time you are done, you will truly be an expert. You will understand the software company industry, your competition, and your customers. You will develop a marketing strategy and will understand what it takes to launch and grow a successful software company.
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