What is a Business Plan?
A business plan is a written document that describes in detail how a business—usually a startup—defines its objectives and how it is to go about achieving its goals. A business plan lays out a written roadmap for the firm from marketing, financial, and operational standpoints.
Business plans are important documents used to attract investment before a company has established a proven track record. They are also a good way for companies to keep themselves on target going forward.
Although they’re especially useful for new businesses, every company should have a business plan. Ideally, the plan is reviewed and updated periodically to see if goals have been met or have changed and evolved. Sometimes, a new business plan is created for an established business that has decided to move in a new direction.
What Does Business Plan Mean?
The creation of a new organization or a new business requires coherent actions in order to achieve the desired outcomes. Following a business plan allows to link actions and resources to objectives and measurable goals. This plan can be used internally like a roadmap for the owner but also can be a requirement when looking for funding or partners.
A business plan is generally a precise, short document that commonly contains the following sections: executive summary, business description with its products or services, marketing plan, operational plan and financial plan with its forecasted financial statements for the first years of operation, often five to ten years. The initial business plan is later substituted by annual or bi-annual strategic plans.
A business plan helps you to:
- clarify your business idea
- spot potential problems
- set out your goals
- measure your progress
How Does a Business Plan Work?
If you have an idea for starting a new venture, a business plan can help you determine if your business idea is viable. There’s no point in starting a business if there is little or no chance that the business will be profitable, and a business plan helps to figure out your chances of success.
In many cases, people starting new businesses don’t have the money they need to start the business they want to start. If start-up financing is required, you must have an investor-ready business plan to show potential investors that demonstrates how the proposed business will be profitable.
Business owners have leeway when crafting their business plan outline. They can be short or long, and they can include whatever detail you think will be useful. There are basic templates you can work from, and you’ll likely notice some common elements if you look up examples of business plans.
The market analysis will reveal whether there is sufficient demand for your product or service in your target market. If the market is already saturated, your business model will need to be changed (or scrapped).
The competitive analysis will examine the strengths and weaknesses of the competition and help direct your strategy for garnering a share of the market in your marketing plan. If the existing market is dominated by established competitors, for instance, you will have to come up with a marketing plan to lure customers from the competition (lower prices, better service, etc.).
The management plan outlines your business structure, management, and staffing requirements. If your business requires specific employee and management expertise, you will need a strategy for finding and hiring qualified staff and retaining them.
The operating plan describes your facilities, equipment, inventory, and supply requirements. Business location and accessibility are critical for many businesses. If this is the case for your business, you will need to scout potential sites. If your proposed business requires parts or raw materials to produce goods to be sold to customers, you will need to investigate potential supply chains.
The financial plan is the determining factor as to whether your proposed business idea is likely to be a success. If financing is required, your financial plan will determine how likely you are to obtain start-up funding in the form of equity or debt financing from banks, angel investors, or venture capitalists. You can have a great idea for a business, along with excellent marketing, management, and operational plans, but if the financial plan shows that the business will not be profitable enough, then the business model is not viable and there’s no point in starting that venture.
Types of Business Plans
Business plans help companies identify their objectives and remain on track. They can help companies start and manage themselves, and to help grow after they’re up and running. They also act as a means to get people to work with and invest in the business.
Although there are no right or wrong business plans, they can fall into two different categories—traditional or lean startup. According to the Small Business Administration, the traditional business plan is the most common. They are standard, with much more detail in each section. These tend to be much longer and require a lot more work.
Lean startup business plans, on the other hand, use a standard structure even though they aren’t as common in the business world. These business plans are short—as short as one page—and have very little detail. If a company uses this kind of plan, they should expect to provide more detail if an investor or lender requests it.
Who Needs a Business Plan?
If you’re just planning on picking up some freelance work to supplement your income, you can skip the business plan. But, if you’re embarking on a more significant endeavor that’s likely to consume a significant amount of time, money, and resources, then you need a business plan.
If you’re serious about business, taking planning seriously is critical to your success.
Unfortunately, many people think of business plans only for starting a new business or applying for business loans. But business plans are also vital for running a business—strategic planning—whether or not it needs new loans or new investments. Existing businesses should have business plans that they maintain and update as market conditions change and as new opportunities arise.
Every business has long-term and short-term goals, sales targets, and expense budgets—a business plan encompasses all of those things and is as useful to a startup trying to raise funds as it is to a 10-year-old business that’s looking to grow.
1. Startup businesses
The most classic business planning scenario is for a startup, for which the plan helps the founders break uncertainty down into meaningful pieces, like the sales projection, expense budget, milestones, and tasks.
The need becomes obvious as soon as you recognize that you don’t know how much money you need, and when you need it, without laying out projected sales, costs, expenses, and timing of payments. And that’s for all startups, whether or not they need to convince investors, banks, or friends and family to part with their money and fund the new venture.
In this case, the business plan is focused on explaining what the new company is going to do, how it is going to accomplish its goals, and—most importantly—why the founders are the right people to do the job. A startup business plan also details the amount of money needed to get the business off the ground, and through the initial growth phases that will lead (hopefully!) to profitability.
2. Existing businesses
Not all business plans are for startups that are launching the next big thing. Existing businesses use business plans to strategically manage and steer the business, not just to address changes in their markets and to take advantage of new opportunities. They use a plan to reinforce strategy, establish metrics, manage responsibilities and goals, track results, and manage and plan resources including critical cash flow. And of course, they use a plan to set the schedule for regular review and revision.
For existing businesses, a robust business planning process can be a competitive advantage that drives faster growth and greater innovation. Instead of a static document, business plans in existing businesses become dynamic tools that are used to track growth and spot potential problems before they derail the business.
Traditional Business Plan Format
You might prefer a traditional business plan format if you’re very detail oriented, want a comprehensive plan, or plan to request financing from traditional sources.
When you write your business plan, you don’t have to stick to the exact business plan outline. Instead, use the sections that make the most sense for your business and your needs. Traditional business plans use some combination of these nine sections.
Briefly tell your reader what your company is and why it will be successful. Include your mission statement, your product or service, and basic information about your company’s leadership team, employees, and location. You should also include financial information and high-level growth plans if you plan to ask for financing.
Use your company description to provide detailed information about your company. Go into detail about the problems your business solves. Be specific, and list out the consumers, organization, or businesses your company plans to serve.
Explain the competitive advantages that will make your business a success. Are there experts on your team? Have you found the perfect location for your store? Your company description is the place to boast about your strengths.
You’ll need a good understanding of your industry outlook and target market. Competitive research will show you what other businesses are doing and what their strengths are. In your market research, look for trends and themes. What do successful competitors do? Why does it work? Can you do it better? Now’s the time to answer these questions.
Organization and management
Tell your reader how your company will be structured and who will run it.
Describe the legal structure of your business. State whether you have or intend to incorporate your business as a C or an S corporation, form a general or limited partnership, or if you’re a sole proprietor or LLC.
Use an organizational chart to lay out who’s in charge of what in your company. Show how each person’s unique experience will contribute to the success of your venture. Consider including resumes and CVs of key members of your team.
Service or product line
Describe what you sell or what service you offer. Explain how it benefits your customers and what the product lifecycle looks like. Share your plans for intellectual property, like copyright or patent filings. If you’re doing research and development for your service or product, explain it in detail.
Marketing and sales
There’s no single way to approach a marketing strategy. Your strategy should evolve and change to fit your unique needs.
Your goal in this section is to describe how you’ll attract and retain customers. You’ll also describe how a sale will actually happen. You’ll refer to this section later when you make financial projections, so make sure to thoroughly describe your complete marketing and sales strategies.
If you’re asking for funding, this is where you’ll outline your funding requirements. Your goal is to clearly explain how much funding you’ll need over the next five years and what you’ll use it for.
Specify whether you want debt or equity, the terms you’d like applied, and the length of time your request will cover. Give a detailed description of how you’ll use your funds. Specify if you need funds to buy equipment or materials, pay salaries, or cover specific bills until revenue increases. Always include a description of your future strategic financial plans, like paying off debt or selling your business.
Supplement your funding request with financial projections. Your goal is to convince the reader that your business is stable and will be a financial success.
If your business is already established, include income statements, balance sheets, and cash flow statements for the last three to five years. If you have other collateral you could put against a loan, make sure to list it now.
Provide a prospective financial outlook for the next five years. Include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, be even more specific and use quarterly — or even monthly — projections. Make sure to clearly explain your projections, and match them to your funding requests.