A business plan is a written document used to describe a proposed venture or idea. It typically includes the current state of a business, future vision for the business, target market analysis and challenges, sales and marketing strategies, and funding requirements to reach stated goals. Many business plans are designed with the intention of securing funding and investors to support a proposed idea; others are designed to assist with reorganization, takeovers, or to serve as an internal planning document.
A business plan can also offer clear, immediate advantages to struggling companies, or to those intending to sell their business concepts. Mike McKeever gives several of these advantages in How to Write a Business Plan:
- A business plan will help the business find financial backers. Because investors require a business plan before giving a company any significant backing, it is a good idea to plan and write one before looking for aid. After creating a plan, leaders of the business will understand more clearly where their money goes and what it is spent on—information the investors will want to know.Page 98 | Top of Article
- A business plan will help a starting company decide whether to proceed or stop. Creating a plan for a new business allows leaders to examine potential strengths and weaknesses of the business, giving them the confidence to move forward or possibly the knowledge to reassess the functionality of their ideas.
- A business plan allows leaders to improve the business concept. In making the plan, leaders may realize parts of the organization they need to change or reevaluate. Writing the plan gives a chance to change the goals of the business for the better.
- A business plan helps keep the business on track. With the straightforward rules, goals, and parameters of the plan written down, a business has more focus. In this way, the business plan can also act as an action plan for a company, describing goals and the steps needed to accomplish them.
According to Per Davidsson and Benson Honig in “A Closer Look at Business Planning: Early Stage Outcome Effects of How It Is Prepared and Used,” business plans are also useful because they act as a way to legitimize a business, especially when it is new or very small. Davidsson and Honig describe the business plan as a “calling card” that provides an important first impression of a business.
ELEMENTS OF A BUSINESS PLAN
The U.S. Small Business Administration recommends that a business plan describe four main elements of the proposed venture: an overview of the business, a marketing analysis, a financial plan, and a management plan. An executive summary and other supporting documents should also accompany the plan. These elements provide a solid starting point for a general plan, but there is no single formula to a business plan and a multitude of factors will impact the amount of content needed in a good business plan.
The executive summary is a synopsis of the entire business plan. It is critical that this summary be carefully crafted and compelling. This is the first and possibly the only information that a potential investor will read; if it is not informative enough or if it lacks crucial data, the investor might not read beyond this summary component.
The business overview segment is a profile of the company and its primary industry. Projections, trends, and industry outlooks should be included. In this section the company describes the unique elements that make it a prime candidate for its proposed venture.
A market analysis details how the company will handle its sales and marketing strategies. This analysis includes information on the company's products or services and intended customers, and how customers will be made aware of the product or service. This section should also include a competitive analysis with a breakdown identifying Strengths, Weaknesses, Opportunities, and Threats (SWOT) in connection with the company and the business proposed. A plan of action should explain how the company will address, exploit, or withstand each of these eventualities.
The financial section discusses the current financial state of the company and what types of financing will be required for the proposed venture. It is appropriate to discuss the specific dollar amounts required for the business venture, the cost to maintain and sustain the venture, and projections of income, balance sheets, and cash flow. Statistics, facts, and research should support any financial projections listed. Many experts recommend the SMART model of financial analysis. According to the SMART system, the business should be able to list and explain how its goals are Specific, Measurable, Achievable, Realistic, and Timed. Specific goals should be natural to a strong business plan. Measurable goals should include current and expected data, along with systems of analysis to track changes. Achievable and realistic goals can be met within the framework of the business's assets and skills, and timed goals are set forth at the proper moment in the organization's evolution.
The management plan section should discuss the strengths, experience, achievements, and expertise of the person or team undertaking the business venture. Investors want to know that they are offering their support to a person or team qualified and capable of handling the business proposed and the funds loaned.
A complete business plan will provide evidence to the lender that the entrepreneur has performed a thorough investigation of this new business venture because it details how the business will generate cash flow, pay for operating expenses, and service debt repayment.
The accompanying table offers several elements for inclusion in designing a business plan.
In addition to these structures, Edward Rogoff, in Bankable Business Plans, gives six main strengths every business plan should convey. Rogoff calls these strengths the six immutable points and believes these points should be proven to any reader of the business plan.
- You are profit-oriented.
- You are honest.
- You are qualified.
- You are thorough.
- You are committed to meeting everyone's needs.
- You are flexible.
David Dixon, in the Evening Gazette, notes that the appearance of the business plan is important. If someone is using the business plan to get financing, the presentation of the plan can influence lenders and other professionals before they even read a word. Dixon notes that the plan should feature clear subheads, a title of contents and page numbers for easy browsing, and a professional cover. He further suggests that the business plan be legible and formatted so that it can easily be easily emailed and shared online as needed.
CUSTOMIZING FOR INVESTOR TYPE
Bankers, venture capital fund managers, and business angels (wealthy individuals who exchange company equity for start-up cash) each look at different features of a business plan when assessing it for investment. Bankers tend to focus on the financial aspects of the plan and give little attention to marketing and management issues. Venture capital fund managers are typically most interested in both the marketing and the financial aspects of the plan. Business angels focus on entrepreneurial elements and “investor fit” considerations. Thus business plan writers should customize their proposals based on the audience they are trying to reach.
Bankers are interested in businesses that will be successful over the long term and entrepreneurs who will remain committed to the project as described in the business plan. When making their lending decisions, they are interested in collateral as security for the loan. Bankers tend to support projects that are less risky. A banker's main interest is the repayment of the loan.
Venture capital fund managers invest for capital gain; when a venture is successful, they also benefit. If a business fails, venture capital fund managers stand to lose significantly and at much cost to the outside investors whose funds they are managing. Therefore, venture capital fund managers focus on the uniqueness of the product or service, the status of the market, and the management team's potential for success. Their main interest is growth potential and potential returns.
The interests of business angels align more closely with those of venture capital fund managers than bankers. Business angels focus on how their interests match up with the entrepreneur's and how well they are able to work with the entrepreneur over the length of the project. They seek out entrepreneurs who have strong, positive qualities, such as integrity and responsibility, and with whom they feel a connection. Because the investment is personal for the business angel, he or she is interested not only in financial gains but also in the enjoyment that comes with the opportunity to participate in the venture. A business angel's main interest is potential returns, camaraderie with the entrepreneur, and personal involvement.
Fred S. Steingold, in The Complete Guide to Selling a Business, writes that a good business plan will aid investors in several other, more intangible ways. The strength of a strong vision for business direction can inspire interested buyers, communicating the power of the idea as well as the financial prospects. Investors who believe in the organization's goals will be much more likely to understand business models and provide financial support for endeavors. Also, Steingold believes a strong business plan gives buyers a cushion, something to rely on when they get cold feet. Negotiations can go on for weeks, and when time lends uncertainty to the buyer's decision, the buyer can rely on the business plan as proof the sellers know what they are doing.
As Davidsson and Honig note, business plans have received criticism for being labor-intensive and time-consuming while providing little flexibility. By their very nature, business plans require businesses to list specific details about a business. However, many businesses change rapidly, leaving some to question whether the business planning model is flexible enough for a dynamic business model. Davidsson and Honig also note that the business plan can provide Page 100 | Top of Articlea type of structure and certainty that can be useful in an uncertain and changing environment.
Another major challenge managers and entrepreneurs face when writing a business plan is the amount of research involved. While a company may have access to internal documentation about itself, a good business plan usually involves competitive analysis, a look at the industry as a whole, market research, and other forms of outside research. There are companies that will compile this research on behalf of businesses. There are also government agencies as well as private companies offering research reports that can be useful during the writing process.
One trend in recent years is the competitions that have been developed to help entrepreneurs secure capital based on the strength of their business plans. Competitions such as the Rice Business Plan Competition, New York Business Plan Competition, the Wisconsin Governor's Business Plan Contest, and the Pam Wright Chair in Entrepreneurship Business Plan Competition at Middle Tennessee State University provide entrepreneurs with tens of thousands of dollars in funding. All business owners need to do is craft a winning business plan and business pitch. Some of these competitions provide mentorship and resources to help businesses create business plans. All allow for a direct route from business plan to financing, without the need for business loans or lenders. As an added bonus, the winners of these business plan competitions often go on to receive a great deal of free publicity, simply by winning or placing in such a competition. For example, competitors in the Rice Business Plan Competition not only receive prize money and media exposure, but competitors who participated between 2001 and 2017 have raised a combined $1.9 billion in funding since their participation.
Some businesses choose to replace the traditional business plan with what is called a “living document,” typically one page in length and with a forward-looking range of one year. Goal setting may be projected on three- to six-month time frames, which are more easily monitored and attainable. The living document contains similar elements of a typical business plan—vision, values, objectives, methods toward reaching objectives—but abbreviated to fit on a single page. This document needs constant updating and adjusting, with ample flexibility to respond to customer and market fluctuations. However, it is a very useful form of business plan for businesses experiencing rapid growth or change. Highly tailored documents may also need to be prepared for each type of stakeholder, whether bankers, venture capital fund managers, or business angels.
While many traditional business plans are designed to help a business present the best possible face to lenders and those outside the business, the feasibility plan is intended more for company managers and owners. The feasibility plan considers a potential business venture and examines whether the venture is likely to make a profit. A business feasibility plan will usually include a detailed description of a product or service, a cost analysis, market research, a description of potential risks, competitive analysis, breakeven analysis, profitability projections, forecasts, details of investment required, budgeting, a conclusion, and recommendations. The feasibility plan essentially allows a business to test, on paper, whether a business idea or venture is likely to work, thereby assisting with decision making. If a business does decide to engage in the venture, the feasibility plan can help provide an action plan or a plan of attack. It generally describes the steps the company will need to take to make a new venture profitable.
Not every business decides to create a feasibility plan for every new service, product, or venture. However, this type of business plan is especially useful in cases where a company's success is determined by the introduction of a new product or service and in cases where a company stands to lose or gain a great deal from a venture. Because they are internal, feasibility plans can be shorter and less formal than business plans submitted to investors and lenders. However, because they are a decision-making tool, feasibility business plans must still be carefully researched and considered. Managers must be careful to do all the research regarding target markets, breakeven points, and likely profitability. Failure to do so can mean that the company becomes entangled in a business venture with little chance of success.
To create a feasibility plan, a manager needs to begin by asking a question, such as, will this new venture likely be profitable? or, should we take part in this new venture? Unlike a business plan, the feasibility plan is designed almost exclusively to help the entrepreneur and manager make an initial decision about a venture. It is important not to have a prejudgment about the profitability or lack thereof of the venture; the role of the feasibility plan is to determine, through careful research, whether a plan is feasible. It is only after all the information has been gathered and carefully analyzed that a decision can be or should be reached. As with a business plan, the feasibility plan will require a careful examination of the company as well as outside research.
A feasibility plans looks much like a business plan, with sections for venture details, budgeting and a cost analysis, market research, competitive analysis, breakeven analysis, profitability considerations, forecasts, an action plan, risks, resources, possible competitive advantages, and a conclusion. Unlike a business plan, the feasibility Page 101 | Top of Articleplan usually ends with recommendations—whether to tackle the new business venture or not. Once a draft of the plan is compiled, it is often a good idea to get other decision makers in the company involved. They can provide feedback, suggestions, and counterarguments that can help managers determine the right decision to make. Once a decision has been made, the feasibility plan can be used as the basis of an action plan to make the venture work. A condensed form of the feasibility plan can also be included in a traditional business plan. This is a good option especially with a start-up company that has few current products, services, and business ventures to describe. The company can use the feasibility studies to show that future business ventures, products, and services have been carefully considered and researched to ensure their success.
There are many resources for the entrepreneur looking to write a business plan. Local business organizations, public libraries, colleges, and universities may offer useful workshops, seminars, or courses. There are also private businesses that offer to write and research business reports on behalf of busy entrepreneurs. Such services range in cost from a few hundred to a few thousand dollars.
Local SBA offices and the SBA website ( sba.gov ) also offer resources. The SBA provides free online courses, email guidance, print materials, and face-to-face consultations to small-business owners. The SBA also administers the Small Business Development Centers program to provide management assistance to current and prospective small-business owners. This program provides a broad-based system of assistance for the small business community by linking the resources of federal, state, and local governments with the resources of the educational community and the private sector.
One excellent way to learn is to read sample business plans, which are often published and distributed by large companies. According Stephen Fadel in Online, reading business plans is simple; samples are available online, and there are contests that publish winning business plans. Reading the business plans of competitors or large companies within the same industry helps the new manager or entrepreneur learn how such plans are usually compiled.
SEE ALSO Entrepreneurship and New Venture Creation .
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