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. Show
1. FeasibilityEntrepreneurs 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 deviceFormulating 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. 3. ForesightThe 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 capitalA 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 Plan1. Executive SummaryThe 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 DescriptionThis 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:
3. Market StrategiesThe 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 AnalysisThe 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 PlanIt 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 PlanThe 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 FactorsThe 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
Additional ResourcesCFI 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:
Business plans are like road maps: it’s possible to travel without one, but that will only increase the odds of getting lost along the way. Owners with a business plan see growth 30% faster than those without one, and 71% of the fast-growing companies have business plans. Before we get into the thick of it, let’s define and go over what a business plan actually is. What is a business plan?A business plan is a 15-20 page document that outlines how you will achieve your business objectives and includes information about your product, marketing strategies, and finances. You should create one when you’re starting a new business and keep updating it as your business grows. Rather than putting yourself in a position where you may have to stop and ask for directions or even circle back and start over, small business owners often use business plans to help guide them. That’s because they help them see the bigger picture, plan ahead, make important decisions, and improve the overall likelihood of success.
A well-written business plan is an important tool because it gives entrepreneurs and small business owners, as well as their employees, the ability to lay out their goals and track their progress as their business begins to grow. Business planning should be the first thing done when starting a new business. Business plans are also important for attracting investors so they can determine if your business is on the right path and worth putting money into. Business plans typically include detailed information that can help improve your business’s chances of success, like:
10 reasons why you need a business planI know what you’re thinking: “Do I really need a business plan? It sounds like a lot of work, plus I heard they’re outdated and I like figuring things out as I go...”. The answer is: yes, you really do need a business plan! As entrepreneur Kevin J. Donaldson said, “Going into business without a business plan is like going on a mountain trek without a map or GPS support—you’ll eventually get lost and starve! Though it may sound tedious and time-consuming, business plans are critical to starting your business and setting yourself up for success. To outline the importance of business plans and make the process sound less daunting, here are 10 reasons why you need one for your small business. 1. To help you with critical decisionsThe primary importance of a business plan is that they help you make better decisions. Entrepreneurship is often an endless exercise in decision making and crisis management. Sitting down and considering all the ramifications of any given decision is a luxury that small businesses can’t always afford. That’s where a business plan comes in. Building a business plan allows you to determine the answer to some of the most critical business decisions ahead of time. Creating a robust business plan is a forcing function—you have to sit down and think about major components of your business before you get started, like your marketing strategy and what products you’ll sell. You answer many tough questions before they arise. And thinking deeply about your core strategies can also help you understand how those decisions will impact your broader strategy. Putting together a business plan requires entrepreneurs to ask themselves a lot of hard questions and take the time to come up with well-researched and insightful answers. Even if the document itself were to disappear as soon as it’s completed, the practice of writing it helps to articulate your vision in realistic terms and better determine if there are any gaps in your strategy. 3. To avoid the big mistakesOnly about half of small businesses are still around to celebrate their fifth birthday. While there are many reasons why small businesses fail, many of the most common are purposefully addressed in business plans. According to data from CB Insights, some of the most common reasons businesses fail include:
The exercise of creating a business plan can help you avoid these major mistakes. Whether it’s cash flow forecasts or a product-market fit analysis, every piece of a business plan can help spot some of those potentially critical mistakes before they arise. For example, don’t be afraid to scrap an idea you really loved if it turns out there’s no market need. Be honest with yourself! Get a jumpstart on your business plan by creating your own cash flow projection. 4. To prove the viability of the businessMany businesses are created out of passion, and while passion can be a great motivator, it’s not a great proof point. Planning out exactly how you’re going to turn that vision into a successful business is perhaps the most important step between concept and reality. Business plans can help you confirm that your grand idea makes sound business sense.
Want to prove there’s a market gap? Here’s how you can get started with market research. 5. To set better objectives and benchmarksWithout a business plan, objectives often become arbitrary, without much rhyme or reason behind them. Having a business plan can help make those benchmarks more intentional and consequential. They can also help keep you accountable to your long-term vision and strategy, and gain insights into how your strategy is (or isn’t) coming together over time. 6. To communicate objectives and benchmarksWhether you’re managing a team of 100 or a team of two, you can’t always be there to make every decision yourself. Think of the business plan like a substitute teacher, ready to answer questions any time there’s an absence. Let your staff know that when in doubt, they can always consult the business plan to understand the next steps in the event that they can’t get an answer from you directly. Sharing your business plan with team members also helps ensure that all members are aligned with what you’re doing, why, and share the same understanding of long-term objectives. 7. To provide a guide for service providersSmall businesses typically employ contractors, freelancers, and other professionals to help them with tasks like accounting, marketing, legal assistance, and as consultants. Having a business plan in place allows you to easily share relevant sections with those you rely on to support the organization, while ensuring everyone is on the same page. 8. To secure financingDid you know you’re 2.5x more likely to get funded if you have a business plan?If you’re planning on pitching to venture capitalists, borrowing from a bank, or are considering selling your company in the future, you’re likely going to need a business plan. After all, anyone that’s interested in putting money into your company is going to want to know it’s in good hands and that it’s viable in the long run. Business plans are the most effective ways of proving that and are typically a requirement for anyone seeking outside financing. Learn what you need to get a small business loan. 9. To better understand the broader landscapeNo business is an island, and while you might have a strong handle on everything happening under your own roof, it’s equally important to understand the market terrain as well. Writing a business plan can go a long way in helping you better understand your competition and the market you’re operating in more broadly, illuminate consumer trends and preferences, potential disruptions and other insights that aren’t always plainly visible. 10. To reduce riskEntrepreneurship is a risky business, but that risk becomes significantly more manageable once tested against a well-crafted business plan. Drawing up revenue and expense projections, devising logistics and operational plans, and understanding the market and competitive landscape can all help reduce the risk factor from an inherently precarious way to make a living. Having a business plan allows you to leave less up to chance, make better decisions, and enjoy the clearest possible view of the future of your company. Understanding the importance of a business planNow that you have a solid grasp on the “why” behind business plans, you can confidently move forward with creating your own. Remember that a business plan will grow and evolve along with your business, so it’s an important part of your whole journey—not just the beginning. |