What is a Business Plan?
Financial accounting is about history—what has happened. By contrast, Business Plans look forward in time, to future financial performance and position.
Strictly speaking, the term Business Plan applies to any working plan for running a business for a given time. The "business" in view may be a profit-making company, a government organization, a non-profit organization, a group, or an individual. A business plan may also represent a product line, an individual product, a line of service products, or another part of a larger business entity. All engage in business planning.
The broad meaning above is correct, but organizations that practice formal business planning, and businesspeople who rely on the "business plan" for day-to-day guidance, usually have in mind a more helpful definition:
Define Business Plan
A Business Plan is a practical working plan for approaching
critical objectives, maintaining budgetary discipline, and continuous tracking of operational performance, covering
a specific time span.
A plan that serves these purposes qualifies as a "business plan" if
the plan:
- Specifies clearly the entity whose business the plan represents.
- Names specific near-term business goals in concrete, measurable terms.
- Fixes the timeline for actions targeting these goals.
- Forecasts costs and incoming funds across the timeline
For companies in private industry, the heart of the business plan is a Business Model and Business Strategy which describe how and where the company expects to make and spend money. All other parts of the business plan stem from the model.
The Business Plan Looks Forward in Time
Accounting records are business history. They describe what has happened. By contrast, the business plan looks forward in time, describing what planners aim to achieve or expect to happen.
Business plans usually look forward for one to three years to a
"planning horizon," which moves forward periodically with plan reviews and updates.
Business plans for different organizations will differ somewhat in content and structure, but most are designed to address two fundamental kinds of questions:
- What will the business look like in one year? Two, or three years? That is, what will business performance look like and what will the financial position look like then?
- How does the organization bring about the desired performance and build a stable financial situation?
Founders and owners typically develop an initial business plan before startup. They build the plan anticipating using it as a tool for supporting their requests for investment capital or loans to start the business. Once the company is operating, the business plan becomes a living document, which management reviews and revises at least quarterly.
Explaining the Business Plan in Context
Following sections further describe and illustrate Business Plan concepts in context with concepts from business strategy and business case analysis, focusing on four themes:
- First, definition, purpose, and role of the Business Plan.
- Second, typical Business Plan structure and contents.
- Third, how to create a Business Plan in 7 Steps.
- Fourth, Comparing and contrasting the Business Plan with the Business Case.
Contents
Business Plan Purpose
What Are the Primary Uses for the Business Plan?
The business plan typically serves quite a few different purposes including the following. An in-depth business plan:
Projects the Financial Future
The main item of interest in the business plan, for many people, is a picture of the financial future. The plan projects the future economic situation and financial performance of the company, for owners, investors, and potential investors.
Identifies and Measures Risks
An in-depth business plan Identifies and measures significant risks for the business. These are events that would lead to different financial situations and financial performance results. The document must therefore also present strategies for dealing with threats and managing risks.
Describes the Business Model
The business plan defines and outlines the company's business model. The model shows where and how the company expects to spend money, bring in revenues and earn margins. And, the model includes a quantitative Pro-forma Income statement estimating gross margin, operating margin, and profit margin.
Identifies Key Assumptions
A complete business plan Identifies critical assumptions and trends underlying future financial results for the company. These may include trends in business volume, market demand, competitors actions, or prices of goods and services crucial to the business. As a result, senior managers watch these trends closely and update the plan when they change.
Helps Prioritize Business Objectives
A complete business plan guides management in setting and prioritizing business objectives. The business plan thereby provides a basis for:
- Setting financial targets for financial goals.
- Setting targets for key performance indicators for nonfinancial objectives.
- Setting targets for key performance indicators for nonfinancial objectives.
- Identifying contingencies and critical success factors critical for meeting objectives.
Source for Budgeting
The business plan serves as the primary starting resource for developing budgets. The business plan serves as the primary starting resource for developing budgets. In this role, it is indispensable for budgetary work because it captures the company's forecasts for spending and incoming revenues.
Serves as a Resource for Business Case Analysis
The business plan is a critical resource for those building or evaluating business case analyses. Business Case Analysis is central for instance, for supporting capital acquisitions, investments, product or marketing decisions, and project proposals.
What Are Business Plan Contents?
How Are Business Plans Structured?
The contents, structure, and emphasis in the business plan are designed to address purposes that are most important to management, owners, and investors.
Business Plan For a Startup Company
Founders of a business startup construct a business plan, intending to show potential investors or loan sources all of the following:
- The company's business prospects are good.
- Managers and Directors are competent.
- Officers and managers understand the company's products, markets, and competition.
- The company's strategy is sound.
- Planning is robust and realistic.
- Investors can expect a good return on their investment.
Business Plan for an Established Company
A business plan for an established company that is performing well will emphasize the same points as the plan for a startup company, above. By contrast, the business plan for a poorly performing company poorly will try to make these points:
- Officers and managers understand the reasons for poor business performance.
- Company leadership has a promising strategy for improving performance. One such approach, for instance, could be changing the business model.
- Officers and managers have the means and ability to implement an improvement plan.
Business Plan for Government and non-profit organizations
Business plans for government and non-profit organizations can be very similar to those for companies in private industry sell goods and services. The similarity is necessary because governments and non-profit organizations still must:
- Deliver services.
- Recognize they have a "market" and "customers, " These organizations, in other words, have a population to serve.
- Create and operate within spending budgets.
- Find ways to receive funds to cover expenses.
Create a Business Plan in 7 Steps
How to Write the Business Plan for Achieving Strategic Objectives
The emphasis and order of business plan components can, of course, differ from business to business. Nevertheless, a business plan template or business plan model for most companies would almost certainly include at least some treatment of all of the following sections.
Step 1. Write High-Level Description of the Business
Describe the business of the company or organization and provides a brief history and status summary of the firm.
Step 2. Describe Products and Services
Describe what the organization sells or delivers. Include the company's value proposition. Also, include a strategy for continuing or evolving products/services to remain competitive and grow the business. This section may also include product, manufacturing, distribution, and service plans.
Step 3. Describe the Market.
Describe the market the business addresses (or the population served). The description should include the following:
Also, include marketing strategy and marketing plan.
Step 4. Describe the Business Location and Manner of Doing Business.
Describe the role physical location does or does not play in the business and the manner of selling. Also, describe how the firm delivers products and services. Such descriptions could refer to "brick and mortar" stores, internet sales, or mail order sales and delivery, for instance. And, finally, describe the role (if any) of a direct sales force.
Step 5. Describe Management and Governance.
Describe management organization and management levels, lines of reporting and accountability. Also, describe capabilities and professional experience and skills necessary for management.
6. Develop and Summarize Company Financial Information
Include the following:
- Pro-forma (projected future) financial accounting statements for several years or more into the future (Income statement, Balance sheet, statement of changes in financial position, and retained earnings statement).
- Expected sources of funds, e.g., invested capital, sales revenues, loans, and other funding sources,
- Cost structure and expected uses of funds.
- Working capital requirements and expected cash inflows/outflows.
- Business performance projections and financial position financial metrics (including investment metrics, such as return on assets, leverage metrics such as the debt/equities ratio, and profitability metrics such as operating margin and profit margin.
7. Explain the Firm's Business Strategy
Explain how the company defines and distinguishes itself from the competition and identify critical strategic objectives. For instance, explain how the firm expects to achieve industry-leading customer satisfaction. Or, show how the firm will successfully "brand" company products and services for design and quality leadership.
8. Build and Test The Quantitative Business Model
It is fair to say that the business model is the "heart" of the business plan. Or, more accurately, the business model is the framework for describing the business and projected results. Sections 1-7 above show how the company will build on that framework to achieve good results and what they will look in Pro-forma statements.
Business Plan vs. Business Case
What Are the Differences? How Are They Related?
The business case is organized around an action or decision, to address business case questions like those given above. Those questions contrast with the focus of the business plan, which addresses similar issues about the organization (or about the business). The business plan address questions like these:
- What will the "business" look like in one year? In Three Years? That is, what will its financial position and business performance look like then?
- How does the business get to those results?
- What sales, margins, and revenues can we expect next year?
- How many years will it take this startup firm to become profitable?
Confusion sometimes arises about the differences between the business case and the business plan and the ways they complement each other.
In brief, a business plan (as it appears above) is "all about" the "business" (or the organization, or a part of the firm). The business case is designed to address questions about a single action or decision.
Whereas the business plan asks what the business will look like, the business case asks: What will be the consequences (in business terms) if we take this or that action? In contrast to the business plan questions above, the business case addresses issues like these:
Business cases are designed to answer questions like these about the consequences of an action or decision:
- What will be the financial consequences if we choose X or do Y?
- Are there critical nonfinancial outcomes can we expect in either case?
- What will we need as a capital budget next year if we decide to buy the service vehicles instead of leasing them?
- Is the investment in new phone technology justified? Is there a positive ROI?
Business Case and Business Plan Compared
The table below summarizes and contrasts the essential differences between a business case and a business plan.
| A Business case... | A Business Plan... | |
|---|---|---|
| Is organized around: | A single action or single decision and its alternatives. | An organization or the entire enterprise. The plan may cover a single product or product line or the whole organization. |
| Predicts: | Cash flow results and critical nonfinancial impacts that follow from the action. | Business performance of the organization, especially in the main categories of the Income statement. May include projected Pro-forma Income statements or Balance sheets for future years. |
| Focuses on: | Business objectives for the action (what the act intends to accomplish). | Business objectives for the organization. |
| Is based on: | A cost model and a benefits rationale, designed for the case, and applied to one or more action scenarios. | The business model for the organization (showing where and how the company makes money, similar to Income statement), as well as expected trends, competitor actions, etc. |
| Measures: | Financial metrics such as NPV, IRR, ROI, payback period, and TCO, based on projected cash flow. Also includes critical nonfinancial impacts. | Business performance in terms such as sales, margins, profits, and business "health" by contributions to important Balance sheet categories |
| In a non-profit or government organization: | The scope of the case may include benefits and costs to the population served as well as the organization itself. | May focus on funding needs, budgetary requirements, and ability to operate within a budget. |
A business case can support a business plan by helping answer questions like this: "How will the action impact the organization's business performance?
A business plan can support a business case by helping case developers estimate costs and expenses, revenues, and expected changes in these areas.
