Business plan – definition and meaning
A business plan is a formal document that outlines a series of goals and strategies. It also contains financial forecasts. It is where you state not only what you will achieve, but also how you will do it. In other words, your business plan includes the steps that you will take to get there.
It is essentially a decision-making tool. In fact, a business plan can reduce the risk of failure. Nobody should set up a business without a business plan.
Business plans can help measure your progress. They may also identify potential future problems.
For start-ups, a good business plan increases your likelihood of securing investment from venture capitalists. Before approving a business loan, banks will ask for a business plan.
The Stanford Graduate School of Business says:
“[A business plan] serves as the means of communication with potential sources of funding, describing both the business and the entrepreneur’s ability to organize and conceptualize the details.”
Business plan – what to include
According to the U.S. Small Business Administration, you should include the following in a business plan.
- Executive summary – this is a quick summary of your business plan. In other words, it highlights your main goals.
- Company description – what does your business do? How is it different to others?
- Market analysis – what competition is there? Research and describe your business industry.
- Organization and management – how will you organize and manage your business?
- Product line – what does your business sell?
- Marketing and sales – how do you plan on marketing your business? Also, how will you sell your products?
- Financial projections – if you are asking for a loan or investment, make financial projections. You need to back up your request.
How to make a business plan?
Below is a guide on how to approach each of the different elements of a business plan:
The Executive summary
For a start-up, you cannot include much background information. However, this is your opportunity to show that you have the experience to start this particular business. If there is a gap in your target market, make sure you mention it!
Established businesses should include the following:
- A Mission Statement – what is your business and what is its purpose? Your mission statement must be short. In fact, try to condense this information to one paragraph.
- Company Information – when did your business start? How many employees does it have, and where is it?
- Growth Information – include financial information highlighting your company’s growth. Include, for example, profit margins.
- Products – explain what products or services your business is selling.
- Future plans – include all the future plans you have for your business. Above all, explain where you think you see the company in a few years’ time.
The Company Description
Think of this part as your ‘pitch’. In other words, it helps investors or lenders understand the concept of your business. Also, it helps them appreciate the uniqueness of your company
The company description is a review of all the different elements in your business.
Your company description should include:
- The marketplace needs that your business is trying to fill.
- The products that will meet these needs.
- What organizations or consumers will your business serve?
- The competitive advantages that your business has. For example, does it have expert personnel or an ideal location?
Typically, the market analysis section comes after the company description. Show how much you know about the market. Additionally, include as much research as you can find to support your plan.
The market analysis section should include:
- General industry description and outlook.
- Your target market.
- The size of your market, i.e., how many consumers are there and how much do they spend?
- Competitive analysis and the amount of market share you can gain.
- Any regulatory restrictions. For example, has the Government banned you from doing business with a potentially major market?
Organization and Management
How is your business structured? This section should include details about the ownership of the business.
It must also have information on the management team. In other words, explain who’s who in the business and what their purposes are.
Describe each department of your business. If you have an advisory board, be sure to include who is in it. Also, say whether you plan on keeping them there.
Make a simple organizational chart with a narrative description. This will subsequently show that there is someone in charge of each different function of your company.
In addition, it is important to include the legal structure of the business and all ownership information. Is your business a partnership or a corporation? Are you the sole proprietor (British English: sole trader)?
Include the following:
- Names of the owners of the business and their percentages and form of ownership.
- Outstanding equity equivalents.
- Resumes (CVs) of the most important people in your company.
Describe what the benefits of your products or services are for potential customers. Mention every single advantage that your product compared to your rivals’ products.
Also, include details about your product’s life cycle and list any pending or existing copyright or patent filings.
Marketing and Sales
Your business plan should include all the details on marketing and sales strategies that you will be executing.
An overall marketing strategy should include:
- A growth strategy.
- Channels of distribution strategy.
- Communication strategy.
- A market penetration strategy.
If you combine a company’s goals and objectives into one plan, you have a marketing strategy.
An overall sales strategy should include:
- The business’ sales activities.
- A sales force strategy.
Established businesses should detail all historical data about the company’s performance. Ideally, you should include information dating back five years.
Financial data should include:
- Income statements.
- Cash flow statements.
- Balance sheets.
New and established businesses should provide prospective financial data. In other words, how do you expect your company to perform during the next five years?
Include forecast income statements, cash flow statements, balance sheets, and budgets.
Business plan vs. business case
People often use the terms business case and business plan interchangeably. However, they are not the same.
A business plan covers the whole company. A business case, on the other hand, is about one single action or decision.
For example, a business plan may talk about how to make the company more profitable. This might include reducing staff or stopping the production of some products. The business plan may also propose rearranging its middle management structure.
A business case, on the other hand, looks at just one thing, such as closing down a factory.
Business plan vs. feasibility study
The term is similar to a feasibility study. Even though their meanings are similar, they are not the same.
When somebody has an initial idea, the company carries out a study. We call that study a feasibility study. We also refer to it as a feasibility analysis.
The study looks at the pros and cons of the idea, and whether it is viable. It also tries to determine whether it makes business sense, i.e., is it profitable? Viable, in this article, means ‘leading to profits and business success.’
Will it work? Feasibility study
If you want to know whether something will work, you carry out a feasibility study.
How will it work? Business plan
When you want to know how something will work, you do a business plan.
This MBN video explains what a business plan is in a way that’s easy to understand: