Business Plan

What It Means

A business plan is a document that describes what a business is, what strategies it will use to accomplish its financial goals, and how it expects to do business as it grows, usually planning for several years into the future. Business plans are usually created when companies are just starting. A small business that is simply organized may develop a very basic business plan. A large company that produces many different products usually has an extensive business plan. Every business plan addresses four essential categories: the business itself (what products or services it will produce), the market for the product or service, the financial profile of the business, and the person or persons who will manage production of the product or service.

There are many purposes for a business plan. One purpose is to help those who are starting or running a business to have a clear, detailed account of the most important aspects and goals of the business. After a business plan is drawn up, a business can use it as a measurement of its progress and performance. Entrepreneurs often rely on their business plan to help them attract potential investors. Some businesses use their business plan to try to recruit potential employees or to develop relationships with suppliers of raw materials the business needs.

A business plan may be changed, updated, or completely revised when significant changes occur in the company. Sometimes businesses need to generate a new business plan because an existing plan is no longer useful. If a business operates within a rapidly changing industry, then its business plan may be updated at the start of a new financial period (annually, quarterly, or even monthly). If a business needs to borrow money, lenders will need an up-to-date plan to help them determine how much they should loan the business. If changes in customer needs or new regulations have affected the market, then an updated plan will show how the business intends to respond to those changes. If the business is about to develop a new product or service, an updated plan will detail the market, financing, and production of the new product. When a business reaches an important growth point, such as moving to a larger facility or office or meeting a significant sales goal, it usually updates its business plan to reflect this growth.

When Did It Begin?

Business plans as they are known today originated during the period of rapid economic growth following World War II. During that time a method of rehabilitating large companies that had run into financial trouble known as long-term (or long-range) planning emerged. Long-term planning addressed the major aspects of a business, including its finances, products, management, and sales and marketing strategies. Business planning advanced in the 1970s and 1980s. Businesses began detailing more complex business activities in their plans, including operational activities, forecasts of consumer demand for products, and strategic approaches to new markets.

In 1984 University of Texas Business School students developed a competition in which Masters of Business Administration (MBA) students worked in teams to create an idea for a new business, develop a business plan, and present the plan to a panel of judges. By 1989 the program had expanded to include teams from other prestigious U.S. schools, and in 1990 the competition was opened to participants from Europe, Latin American, and Asia. Other U.S. universities launched their own business plan competitions, and many entrepreneurs who have won these competitions were able to turn their plans into successful business ventures.

More Detailed Information

In a new business the person who is promoting the business will sometimes consult with finance or marketing experts while creating a business plan. In an existing business, a group of people from different areas of the company, such as finance, marketing, and product development, will come together to revise the business plan. While each business plan is different because it is written to address the unique needs of a particular business, every business plan follows roughly the same format.

The first section of the business plan is called the executive summary. This section outlines the entire plan and presents a strong, succinct case for the creation and funding of the business. Generally, the executive summary describes the reason why the plan is being written or rewritten, the background of the company, the product or service and why it is unique or necessary in the market, the market for the product, the financial projections in terms of how much money the product will cost to make and how much the product will sell for, the management team’s qualifications, and the plan for spending the money raised.

The next section of the plan is called the business profile. It describes the market for the product or service and shows how the business is unique and why it will succeed in the industry. This section also provides a description of the product’s development as it currently stands. For example, the product may be partially or fully developed, or it may still be in the planning stages. Finally, this section states the objectives of the business. For example, a business may strive to become a high-ranking business in a particular industry. Or, it may aim to make a certain amount of profit by its fifth year.

The market section of the plan draws together data to give a profile of the current market for the new product or service, including the market’s size and its growth. The number of potential users for the product or service is a critical piece of information here. If the market for a product is seasonal (as it is for many types of agricultural and tourism products), this information is conveyed in this section. If there are outside factors, such as government regulations, which affect the market, these are also covered in this section. Most products are developed with a targeted group of consumers in mind. The market section of the plan describes these consumers as well as how the business will differ from the existing competition for the same consumers in the industry.

The next section of the plan addresses how the company will reach its business goals. For example, if one of the business’s goals is to reach a certain volume of sales to a particular audience, this section explains how the business will reach that goal. Generally, this section states the strategy the company will use to reach each goal of the plan. It may even set milestones for reaching the goal and describe how these milestones will be achieved. For example, if one of the company’s goals is to sell the product to 10 percent of the market within the first three years of operation, then a sales strategy might include an unconditional guarantee on the product to consumers. The plan would outline how to present the information about the guarantee to consumers and how to survey customers to find out how the guarantee affected their purchasing decisions.

A marketing strategy is another key component of the business plan. It is an explanation of how a product will be defined in relation to its competitors and how customer perceptions about the product will be shaped. For instance, a perfume may be marketed as an elite, luxury product for high-end consumers or as an affordable, everyday product for middle-market consumers. Finding a position in the market is known as finding a “niche.” Other essential parts of the marketing strategy are pricing a product and showing the amount of sales projected over certain time frames. This may also involve describing the organization of the sales department and incentives for sales employees.

The section of the business plan that describes the business’s management structure shows that the firm has the necessary resources to plan, organize, control, and lead the business. The management section summarizes the backgrounds and qualifications of key leaders in the company and external persons, such as CPAs, bankers, and attorneys, who may make contributions to the business. This section of the plan also describes the organizational structure of the business, the costs for staffing, and the facilities that the business uses.

The final section of the business plan addresses the financial aspects of the business, which many people consider to be the heart of the business plan. The section first summarizes financial needs, which shows how much cash a business needs to begin operations or to begin a new phase of business. Depending on the business, this section also covers a revenue model, which shows how the company will generate money. If the business aims to generate revenue through selling its product, this section shows how the pricing of the product will affect revenue. A profit-and-loss statement (also called an income statement) is also included here and lists the business’s profits and losses over a period of time. Other documents that may be included here include the cash-flow statement, which shows the amounts of cash needed over a period of time as well as cash coming in, and the balance sheet, which states the value of the business’s assets and debts.

Recent Trends

The growth of personal computing and the Internet has given people ready access to financial and business tools and information. Entrepreneurs use the Internet to conduct market research for their product or to find information on how to price products, how to create a sales strategy, and how to write their business plan. Spreadsheet software helps business owners create the financial documents, such as cash-flow predictions and forecasting models, they need in their business plans. Other types of software help users create entire business plans. In addition to using these resources, many people faced with the daunting task of writing a business plan work with a consultant who can provide broad-based expertise in a particular industry.

Electronic-based business plans can be easily customized to fit specific situations and audiences. For example, a business plan may be formatted specially as a graphic presentation to a group of investors. Or, if the business plan is presented to a supplier, the information in the plan most relevant to the supplier can be highlighted. When a business plan is used internally in a business, it may not need to present specific information on the backgrounds of company management. Customization of a business plan has become increasingly important as businesses strive to differentiate themselves in a competitive global economy.