What is a Business Plan?
A business plan is a summary document that outlines how and why a new business is being created. New entrepreneurial ventures must prepare formal written documents to outline their long-term objectives and the means to be employed to reach said objectives. The business plan underlines the strategies that need to be adopted in order to reach organizational goals, identify potential problems, and devise custom solutions for them.
In addition, potential investors look at business plans to evaluate the risk exposure of a particular entrepreneurial venture. Startups that try to attract employees and investors use business plans to solidify their claims regarding the potential profitability of a particular business idea. Existing companies may use business plans to deal with suppliers or manage themselves more effectively.
- A business plan is a summary document that outlines how and why a new business is being created.
- New entrepreneurial ventures must prepare formal written documents to outline their long-term objectives and the means to be employed to reach said objectives.
- Existing companies may use business plans to deal with suppliers or manage themselves more effectively.
Why Use a Business Plan?
Owing to the following benefits of a well-researched and comprehensive business plan, preparing one is highly recommended, but not a mandate.
Entrepreneurs use a business plan to understand the feasibility of a particular idea. It is important to contextualize the worth of the proposed product or service in the current market before committing resources such as time and money. It helps to expand the otherwise limited view of a passionate innovator-turned-entrepreneur.
2. Focusing device
Formulating a concrete plan of action enables an organized manner of conducting business and reduces the possibility of losses due to uncalculated risks. Business plans act as reference tools for management and employees as they solidify the flow of communication, authority, and task allocation.
The process of preparing a business plan often creates many unintended yet desired results. It functions on the principle of foresight as it helps one realize future hurdles and challenges that aren’t explicit. It also brings a variety of perspectives on the forefront, eventually leading to a more comprehensive future plan of action.
4. Raising capital
A business plan is an effective way of communicating with potential investors, and the level of expertise and time used in preparing a business plan also gives professional credibility to entrepreneurs. It analyzes and predicts the chances of success for the investor and helps to raise capital.
Features of a Good Business Plan
1. Executive Summary
The executive summary functions as a reading guide, as it highlights the key aspects of the plan and gives structure to the document. It must describe ownership and history of formation. It is an abstract of the entire plan, describes the mission statement of the organization, and presents an optimistic view about the product/service/concept.
2. Business Description
This section presents the mission and vision of an organization. Business descriptions provide the concept of one’s place in the market and its benefits to future customers. It must include key milestones, tasks, and assumptions, popularly known as MAT. Big ideas are redundant without specifics that can be tracked. Fundamental questions to be answered include:
- Who are you?
- What is the product or service, and what are its differentiating characteristics?
- Where is the opportunity located?
- When will you start implementing your plan and expects cash flows or profits?
- Why should customers choose your company?
- How do you plan to run the business in terms of structure and regulatory compliance?
3. Market Strategies
The market strategies section presents the target consumer group and the strategies needed to tap into it. It requires meticulous analysis of all aspects of the market, such as demography, cultural norms, environmental standards, resource availability, prices, distribution channels, etc.
4. Competitive Analysis
The competitive analysis section aims to understand the entry barriers one could face due to other companies in the same or complementary sectors. The strengths of existing companies could be co-opted into one’s strategy, and the weaknesses of existing product development cycles could be exploited to gain a distinct advantage.
5. Design and Development Plan
It outlines the technical details of the product and its development cycle within the realm of production. In the sphere of circulation, it focuses on marketing and the overall budget required to reach organizational objectives.
6. Operations and Management Plan
The operations and management plan describes the cycle of business functions needed for survival and growth. It includes management functions such as task division, hierarchy, employee recruitment, and operational functions such as the logistics of the value chain, distribution, and other capital and expense requirements. The managers’ backgrounds must also be briefly included.
7. Financial Factors
The financials section should include the company’s balance sheet and cash flow projections. Financial data is imperative to provide credibility to any assertions or claims made about the future profitability of the business. The aim is to provide an accurate idea of the company’s value and ability to bear operational costs and earn profits.
Common Mistakes to Avoid While Writing a Business Plan
- The plan must not begin by stressing the superiority of one’s product or service, but instead by identifying a genuine problem faced by the consumer. The plan should then be presented as a way of bridging that gap between consumer expectations and industry offerings.
- A team’s expertise is displayed not by listing their academic achievements and employment history, but by stressing how the team’s experience is best suited for a particular industry sector or product. Often, teams with members who have failed in a past venture are successful in attracting capital.
- The most common mistake is to offer an excessively optimistic view of the opportunity. There is no market without competition and no venture without some degree of risk, and a business plan must portray the objective truth with sincerity.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional CFI resources will be very helpful: