A business plan is literally a "plan for the business," where the business may be a profit making company, a government organization, or a non profit organization. A business plan can also represent a product line, an individual product, a line of service products, or some other part of a larger business entity.
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 essentially stem from the model.
The Business Plan Looks Forward in Time
Business plans normally look forward in time for a period of one to three years to a "planning horizon," which moves forward periodically with 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? (I.e., what will business performance look like and what will the financial position look like?)
- How does the organization bring about the desired performance and financial position?
Companies typically develop a first business plan before start up. This is because they must use the plan as a tool for supporting owner and founder requests for investment capital or loans to start the business. And, once the business is operating, the business plan becomes a living document, which the firm reviews and revises at least quarterly.
Explaining the Business Plan in Context
Following sections further explain the business plan. Note especially that examples and illustrations appear in context with concepts from business strategy and business case analysis.
- What is a business plan?
- What are the purposes and primary uses for the business plan?
- Business plan contents: What does a business plan contain?
- What does a business plan template look like?
- Compare and contrast: What are the differences between a business plan and a business case?
The business plan normally 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 financial 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 plan must therefore also present strategies for dealing with threats and mitigating risks.
Describes the Business Model
The business plan defines and describes 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 key 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 plan therefore provides a basis for:
- Setting financial targets for financial objectives.
- Setting targets for key performance indicators for non financial objectives.
- Identifying contingencies and critical success factors that must be met in order to achieve objectives.
Source for Budgeting
The business plan serves as the primary starting resource for developing budgets. This is because the business plan captures the company's forecasts for spending and incoming revenues.
Serves as a Resource for Business Case Analysis
The business plan serves 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.
The contents, structure, and emphasis in the business plan will be designed to address the purposes and uses that are most important to management, owners, and investors.
Business Plan For a Start Up Company
A business plan for a start up company will be constructed especially to show potential investors or loan sources all of the following:
- The company's business prospects are good.
- Management and Directors are competent.
- Management understands the company's products, markets, and competition. And, the company's strategy is sound.
- Planning is solid 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 start up company, above. By contrast, the business plan for a company that is not performing satisfactorily will emphasize especially these sections make these points:
- Management understands the reasons for poor business performance.
- Management has promising strategies improving performance. One such strategy, for instance, could be changing the business model.
- Management has 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 plans for private industry companies that sell goods and services. This is because government 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.
Although 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 businesses would almost certainly include at least some treatment of all of the following sections.
1. High Level Description of the Business.
Describe the business of the company or organization and provides a brief history and status summary of the business.
2. Products and Services.
Describe what the business sells or delivers. Include the company's value proposition. Also include a strategy for continuing or evolving products/services so as to remain competitive and grow the business. This section may also include product, manufacturing, distribution, and service plans.
3. 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.
4. 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.
5. 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. 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. Business Strategy
Explain how the company defines and distinguishes itself from the competition, and important strategic objectives. For instance, explain how the firm expects to achieve industry leading customer satisfaction. Or, explain how the company will successfully "brand" company products and services as design and quality leaders. For more on business strategy—and what a good strategy covers—see Business Strategy.
8. The 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 a 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 like. For more on the business model and business strategy, see Business Strategy.
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 for the business plan, which addresses similar questions about the organization (or about the business). The business plan address questions like these:
- What will the business look like in one year? (I.e., what will its financial position and business performance look like?) What will it look like in three years?
- 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 start up company to become profitable?
Confusion sometimes arises about the differences between the business case and the business plan and the ways the complement each other.
In brief, a business plan (as it appears above) is organized around the business (or the organization, or a part of the business). 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 questions 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 important non financial 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 key differences between business case and business plan.
|A Business Case....||A Business Plan...|
|Is organized around...||A single action or single decision and its alternatives.||An organization or the whole enterprise. The plan may cover a single product or product line or the whole organization.|
|Predicts...||Cash flow results and important non-financial 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 action is meant 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 important non-financial 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 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.