What Is A Business Plan?
A business plan is an executive document that acts as a blueprint or roadmap for a business. It is quite necessary for new ventures seeking capital, expansion activities, or projects requiring additional capital. It is also important to remind the management, employees, and partners of what they represent.
Creating a business plan is an indispensable part of any business. The main purpose of creating such a document is to attract prospective investors to provide capital to the enterprise. Therefore, the plan should cover all the important perspectives of a business – financial, operational, personnel, competition, etc.
Table of contents
- A business plan is a critical document for any business – whether a start-up or a well-established one. It can be considered a self-written bible for the company.
- The purpose of this plan should not just be restricted to convincing investors, but it should also extend to the company’s morals and ethics, and every stakeholder should be aware of it.
- It can communicate the business idea’s viability and, most importantly, the entrepreneurs’ dedication to the business. As this dedication keeps them going, the investors are generally motivated to approve a venture when it is evident from the plan.
Business Plan Explained
Business plan writers are responsible for crafting the face of a business organization they hope to build. It cannot be easy because a business plan should be a versatile document that covers various perspectives and aspects of the business that the readers might expect.
The business plan objective is to talk about the company’s unique selling proposition (USP), business culture, and what the company is. Finally, and most importantly, it is not a static document. With the company’s growth, it needs to change by incorporating more relevant information and goals.
The outline of a business plan should be prepared from three perspectives – first, the market; second, the investors; and finally, the company. However, most plans tend to become business-oriented rather than focusing on the market and the investors. This might create a negative impression on the investors.
First, the entrepreneurs must understand a demand-supply gap from the market’s perspective. This gap can be the perfect opportunity for the company. Or maybe the company has an innovative product or service idea, which they believe will have a high demand. Either way, the market should accept the product.
According to the Massachusetts Institute of Technology (MIT) Enterprise Forum, 1978, investors are more likely to approve market-driven businesses rather than technology or service-driven ones.
Also, the plan should address the investors’ needs. What is in it for the investor? Since they invest a lot of money, they expect higher returns. Of course, no investor would demand profits upfront. But it’s important to tell them when they can expect returns and how much. So the business should provide them with the data on the estimated payback period.
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There are many types of business plans based on the size of the document and its scope.
First, depending on the size of the plan, there are traditional and lean start-up plans. The traditional plan is a lengthy document with more than 20 pages. It covers various facets of the business in such a way as to answer the different questions that may arise in the readers’ minds. But the disadvantage of this plan is that it might hold the readers’ concentration only for a limited time.
The lean start-up plan is a concise and brief version of an actual plan, usually consisting of a single page. The demerit of this plan is that it might be too small and not include all the important and relevant information. But the entrepreneurs must be ready to provide the investors with a detailed document if required.
The second classification is based on the scope of the plan. It can be a start-up plan for new businesses seeking capital or an internal plan to communicate with different departments on a new project. Other types based on scope include strategic, feasibility, operations, and growth.
A strategic plan can communicate how the business will achieve its goal, while a feasibility plan can focus on the feasibility of the company’s offerings. For example, the operations plan focuses on production and supply operations. In contrast, a business prepares the growth plan for its aspiring expansion projects, focusing on additional investments and financial projections.
The outline of a business plan should be carefully designed to incorporate all the focus points deemed essential by the audience. The following are the elements of any business plan sample:
- Executive summary – Also known as the elevator pitch, the business plan executive summary is the most important element of any business plan, best fitted in a page or two. A business should draw its plan from the mission and vision, which are the founding principles of any business. Next, it provides an idea and an overview of the company. It also introduces the product or service the company aims to offer. Finally, it is a summary of the plan.
- Business description – This is an elaboration of the company goals and objectives. It includes the market or industry the business belongs to, its target audience, etc. It can also provide information on the company structure and how it operates.
- Market research and analysis – Market research is the concrete floor on which the business plan stands. It should include facts and figures and give the readers an understanding of the market, its preferences, classifications, and the number and size of competitors. Analyzing the market lets businesses identify a gap and fill it. The plan should also inform the market’s acceptance of the product or service.
- Competitive analysis – Competitors can make or break any business. Therefore, before entering the market, the businesses must evaluate how the competitors operate, their profits and costs, their offerings, etc. This will give the enterprise an idea of what it can do differently from the competitors to have the edge over them. This should be effectively communicated to the investors, as it might convince them of the venture’s success.
- Marketing and sales plan – The whole point of any business is to make sales. For this, they need marketing campaigns and strategies targeting the right audience with minimal cost but maximum returns. For example, a firm selling study tools and materials will target students, especially through social media. Like this, businesses should plan their campaigns and decide their advertising channels.
- Operating plan – As the term implies, it talks about how the business is operated. The manufacturing and supply patterns, strategies like agile or lean, inventory approach, etc., decided by the management come under this. In addition, the expected quantity to be produced and supplied in a given period and the reverse logistics plan are good additions to the operating plan.
- Organization description – This gives information on the total employees, departments, management qualifications, job description, and total skill set of the organization’s human resources. The decided salary and wages, HR policies, etc., are also part of an organization’s description.
- SWOT analysis – SWOT analysis helps the business identify its strengths, weaknesses, opportunities, and threats, which will help them choose the critical approach. The business should take advantage of its strengths and opportunities while simultaneously working on the weaknesses and finding the best strategy to deal with the threats. This will balance the company and its internal and external environment.
- Financials – These refer to the financial projections, including the budget, estimated costs, payments, expected break-even point, payback period, etc. Forecasts on expected revenue and costs for at least one year or until the business breaks will be necessary. Also, the net capital requirements with proper accounting calculations must be part of the plan.
- Appendices – This can include other important or relevant documents to prepare the plan. For example, financial documents, proof of people’s acceptance of products, resumes of the management, study on competition, etc.
Presentation is as important as the content when firms draft the business plan. Therefore, it is best to add graphs, pie charts, 3D models, and other visuals, which will enhance the presentation and understandability of the plan. In addition, factual data and simple statistical tools can make the plan look genuine and instill investor confidence.
Let us consider the following instances to understand the concept better:
Jack wants to establish a toy manufacturing business for which he requires considerable funding. However, to make sure the business idea is convincing enough for investors for them to take interest in the project, he designs a business plan. In the plan, he includes everything from the requirements to the sales promotion measures he would be using to make people, especially parents and kids, be aware of the products.
As a special mention, he specified that the material that would be used for manufacturing the toys will be kids-friendly and will have no chemical included that could harm kids even in a minute way. Given the features of the business, Jack tries to mention the strongest points that could help him get the funding from investors.
Sixteen experts from Forbes Business Council collectively listed a few ways in which entrepreneurs can leverage their business plans for making expansion decisions. The main components of preparing such plans range from conducting thorough research to setting realistic standard and ensuring regular reviews to check the progress status from time to time.
This example guides the entrepreneurs with no prior experience of how to write a business plan to understand the basics and accordingly present their ideas to the authorities/investors.
Creating a business plan is more important due to the negative impression its absence can cause rather than the benefits it might provide. The impression is what matters when it comes to a plan. So, let’s understand the importance of making a good impression.
Perhaps the reason why most businesses make a plan is for the investors. These investors can be venture capitalists or financial institutions. For these investors, new ventures are like investments. Hence, before putting in money, they want to be sure if the investment will be worth it.
Therefore, presenting all the important details in an understandable format helps them realize the clarity and the level of commitment the entrepreneurs have towards their business. The business plan writer should also give due to the executive summary and financials while creating the plan.
Secondly, every business needs a blueprint based on which it operates. It should govern the functions of a business and especially in decision-making. Usually, when a plan is created before the enterprise starts functioning, it speaks about the business and what it stands for. Even after the business takes off and expands, it should stick to its roots, which would evolve with the company’s growth.
Making every stakeholder – employees, partners, suppliers, investors, etc. – aware of the plan would increase commitment and sense of belonging to the enterprise. This, too, is important to improve the productivity and contribution of everyone.
Business Plan vs Business Model
Business plan and business model are terms that are considered to be similar, but then, they differ in various aspects from what the emphasis is on to who they target.
Let us have a look at the differences between the two below:
- While a business plan is the document that details every aspect of the business to give investors or readers a complete and clear picture of what the business is or would be all about, a business model defines and describes the channel to be adopted to deliver products and services to consumers.
- The focus of the former is to cover information about every department, section, and services of the business and specify the functions, including sales and marketing, advertising, revenue predictions, etc. On the contrary, the business model emphasize sales funnels, marketing approach to be used, etc.
- Business plans are formulated for investors and other stakeholders of the business, while business models are created for the internal members of the business who have to take care of the distribution of products and services to customers.
- The plans of a business focus on defining and describing the products and services that a company is aiming to produce. On the other hand, the models discuss the ways in which the products and services can be delivered to consumers.
Frequently Asked Questions (FAQs)
The elements of a business plan comprise an executive summary, company description, market research, competitive analysis, SWOT analysis, marketing strategy, operating plan, financial projections, etc.
Businesses create plans on their own by putting relevant content on paper and using their basic computer skills to make it look attractive. Ideally, plans are not expenses. Instead, they are created from the effort of the entrepreneurs.
All plans need not be highly visual. However, adequate data charts, graphs, 3-D models, etc., can make the document look attractive and creates an impression about the effort that has gone into furnishing the plan. It also increases the understandability of the document.
Businesses can draft plans for any period – maybe a year, three years, or just three months. Some plans are also created until the payback period. But it doesn’t mean that the plan is rendered useless after the expiry of the period. On the contrary, a company should always have a constantly updated plan better suited to evolving needs.
This article is a guide to what is a Business Plan. Here, we explain the concept along with examples, components, importance, types, and vs business model. You can also go through our recommended articles on corporate finance –