A company's business plan is one of its most important documents. It can be used by managers and executives for internal planning. It can be used as the basis for loan applications from banks and other lenders. It can be used to persuade investors that a company is a good investment. For start-up ventures, the process of preparing a business plan serves as a road map to the future by making entrepreneurs and business owners think through their strategies, evaluate their basic business concepts, recognize their business's limitations, and avoid a variety of mistakes.
Virtually every business needs a business plan. Lack of proper planning is one of the most often cited reasons for business failures. Business plans help companies identify their goals and objectives and provide them with tactics and strategies to reach those goals. They are not historical documents; rather, they embody a set of management decisions about necessary steps for the business to reach its objectives and perform in accordance with its capabilities.
"By its very definition, a business plan is a plan for the business, clarifying why it exists, who it exists for, what products and services it provides these client groups, how it intends to develop and deliver these products and services, and where it is headed," Rebecca Jones wrote in Information Outlook. "A business plan is a roadmap for the organization, showing the destination it seeks, the path it will follow to get there, and the supplies and wherewithal required to complete the journey."
SITUATIONS THAT REQUIRE A BUSINESS PLAN
Business plans have several major uses. These include internal planning and forecasting, obtaining funding for ongoing operations or expansion, planned divestiture and spin-offs, and restructuring or reorganizing. While business plans have elements common to all uses, most business plans are tailored according to their specific use and intended audience.
When used for internal planning, business plans can provide a blueprint for the operation of an entire company. A company's performance and progress can be measured against planned goals involving sales, expenditures, time frame, and strategic direction. Business plans also help an entrepreneur or business manager identify and focus on potential problem areas, both inside and outside the company. Once potentially troublesome areas have been identified, proposed solutions and contingency plans can be incorporated into the business plan.
Business plans also cover such areas as marketing opportunities and future financing requirements that require management attention. In some instances—such as scenarios in which an entrepreneur decides to turn a favorite hobby into a home-based business enterprise—the business plan can be a simple document of one or two pages. A business proposal of significant complexity and financial importance, however, should include a far more comprehensive plan. A tool and die manufacturer looking for investors to expand production capacity, for example, will in all likelihood need to compose a business plan of greater depth and detail than will a computer enthusiast who decides to launch a desktop publishing business out of his/her home.
Ideally, everyone in the company will use the information contained in the company's business plan, whether to set performance targets, guide decision-making with regard to ongoing operations, or assess personnel performance in terms of the their ability to meet objectives set forth in the business plan. In addition, workers who are informed about the business plan can evaluate and adjust their own performance in terms of company objectives and expectations.
Business plans can also be used in the restructuring or reorganization of a business. In such cases, business plans describe actions that need to be taken in order to restore profitability or reach other goals. Necessary operational changes are identified in the plan, along with corresponding reductions in expenses. Desired performance and operational objectives are delineated, often with corresponding changes in production equipment, work force, and certain products and/or services.
Banks and other lenders use business plans to evaluate a company's ability to handle more debt and, in some cases, equity financing. The business plan documents the company's cash flow requirements and provides a detailed description of its assets, capitalization, and projected financial performance. It provides potential lenders and investors with verifiable facts about a company's performance so that risks can be accurately identified and evaluated.
Finally, the business plan is the primary source of information for potential purchasers of a company or one of its divisions or product lines. As with outside lenders and investors, business plans prepared for potential buyers provide them with verifiable facts and projections about the company's performance. The business plan must communicate the basic business premise or concept of the company, present its strengths as well as weaknesses, and provide indications of the company's long-term viability. When a company is attempting to sell off a division or product line, the business plan defines the new business entity.
PREPARING THE BUSINESS PLAN
The process of preparing and developing a business plan is an interactive one that involves every functional area of a company. Successful business plans are usually the result of team effort, in which all employees provide input based on their special areas of expertise and technical skill. Business owners and managers provide overall support for the planning process as well as general guidelines and feedback on the plan as it is being developed.
Some companies make the planning process an ongoing one. In other cases, such as for a business acquisition, it may be necessary to prepare a business plan on short notice. The process can be expedited by determining what information is needed from each area of a company. Participants can then meet to complete only those plan components that are needed immediately. During the planning process, it is usually desirable to encourage teamwork, especially across functional lines. When people work together to collect and analyze data, they are far more likely to be able to arrive at objectives that are consistent with one another.
A few basic steps can be identified in the planning process. The first step is to organize the process by identifying who will be involved, determining the basic scope of the plan, and establishing a time frame within which the plan is to be completed. Company leaders not only communicate their support for the planning process, they also define the responsibilities of each party involved. Work plans that supplement the general timetable are helpful in meeting deadlines associated with the planning process.
Once the planning process has been fully organized, participants can begin the process of assessment. Internal evaluations include identification of strengths and weaknesses of all areas of the business. In addition, it is generally useful to assess and evaluate such external factors as the general economy, competition, relevant technologies, trends, and other circumstances outside the control of the company that can affect its performance or fundamental health.
Setting goals and defining strategies are the next key steps in the planning process. Using the assessment and evaluation of internal and external factors, fundamental goals for the business are developed. Pertinent areas to be studied include the company's competitive philosophy, its market focus, and its customer service philosophy. Specific performance and operational strategies are then established, based on these goals.
After strategies and goals have been defined, they are translated into specific plans and programs. These plans and programs determine how a company's resources will be managed in order to implement its strategies and achieve its goals. Specific areas that require their own plans and programs include the overall organization of the company, sales and marketing, products and production, and finance. Finally, these specific plans are assembled into the completed business plan.
ELEMENTS OF A BUSINESS PLAN
Business plans must include authoritative, factual data, usually obtained from a wide range of sources. The plans must be written in a consistent and realistic manner. Contradictions or inconsistencies within a business plan create doubts in the minds of its readers. Problems and risks associated with the business should be described rather than avoided, then used as the basis for presenting thoughtful solutions and contingency plans. Business plans can be tailored to the needs and interests of specific audiences by emphasizing or presenting differently certain categories of information in different versions of the plan.
Business plans contain a number of specific elements as well as certain general characteristics. These include a general description of the company and its products or services, an executive summary, management and organizational charts, sales and marketing plans, financial plans, and production plans. They describe the general direction of a company in terms of its underlying philosophy, goals, and objectives. Business plans explain specific steps and actions that will be taken as well as their rationale. That is, they not only tell how a company will achieve its strategic objectives, they also tell why specific decisions have been made. Anticipated problems and the company's response to them are usually included. In effect, business plans are a set of management decisions about how the company will proceed along a specified course of action, with justifications for those decisions. Listed below are brief descriptions of the major elements found in business plans.
EXECUTIVE SUMMARY This is usually a two-to five-page summary of the entire business plan. It is an important part of the plan, in that it is designed to capture the reader's attention and create an interest in the company. It usually includes the company's mission statement and summarizes its competitive advantages, sales and profit projections, financial requirements, plans to repay lenders or investors, and the amount of financing requested.
DESCRIPTION OF BUSINESS The business description includes not only a profile of the company, but also a picture of the industry in which the company operates. Every business operates within a specific context that affects its growth potential. The description of a company's operating environment may cover new products and developments in the industry, trends and outlook for the industry, and overall economic trends.
The intent of the company profile, meanwhile, is to provide readers with a description of unique features that give the company an edge in the environment in which it competes. A brief company history reveals how specific products and services were developed, while descriptions of pertinent contracts and agreements should also be mentioned (information on contracts and legal agreements may also be included in an appendix to the business plan). Other topics covered include operational procedures and research and development.
DESCRIPTION OF PRODUCTS AND/OR SERVICES The goal of this section is to differentiate a company's products or services from those of the competition. It describes specific customer needs that are uniquely met by the firm's products or services. Product features are translated into customer benefits. Product life cycles and their effects on sales and marketing can be described. The company's plans for a new generation of products or services may also be included in this section.
DESCRIPTION OF MANAGEMENT AND ORGANIZATIONAL STRUCTURE The quality of a company's management team can be the most important aspect of a business plan. This section presents the strengths of the company's management team by highlighting relevant experience, achievements, and past performance. Key areas include management's ability to provide planning, organizational skills, and leadership. This section also contains information about the company's ownership and work force. It may present an existing or planned organizational structure that will accomplish the goals set forth in the business plan. Specific management and control systems are often described as well.
MARKET ANALYSIS A thorough market analysis serves as the basis for a company's sales and marketing plans. The analysis generally covers the company's competition, customers, products, and market acceptance. The competitive analysis details the competition's strengths and weaknesses, providing a basis for discovering market opportunities. A customer analysis provides a picture of who buys and uses the company's products or services. This section of the business plan highlights how the company's products or services satisfy previously unfulfilled market needs. It also includes evidence of market acceptance of the company's unique products or services.
SALES AND MARKETING PLAN The marketing plan delineates the methods and activities that will be employed to reach the company's revenue goals. This section describes the company's customer base, products or services, and marketing and sales programs. The latter is supported by conclusions drawn from the market analysis. Different revenue outcomes may be presented to allow for contingency planning in the areas of finance and production.
PRODUCTION PLAN A production plan is usually included if the business is involved in manufacturing a product. Based on the sales and marketing plan, the production plan covers production options that are available to produce a desired mix of products. The production plan contains information that allows for budgeting for such costs as labor and materials. In non-manufacturing companies, this section would cover new service development.
FINANCIAL PLAN This section covers the financing and cash flow requirements implicit in other areas of the business plan. It contains projections of income, expenses, and cash flow, as well as descriptions of budgeting and financial controls. Financial projections must be supported by verifiable facts, such as sales figures or market research. Monthly figures are generally given for the first two years, followed by annual figures for the next three to eight years. If the business plan is written for investors or lenders, the amount of financing required may be included here or in a separate section.
IMPLEMENTATION SCHEDULE This section provides key dates pertaining to finance, marketing, and production. It indicates when specific financing is needed, when specific aspects of a particular marketing campaign will take place, and delivery dates based on production schedules.
CONTINGENCY PLANS This section defines problems and challenges that the company may face and outlines contingency plans for overcoming obstacles that might arise. Specific topics that may be explored are competitive responses, areas of weakness or vulnerability, legal constraints, staffing, and continuity of leadership.
OTHER DETAILS Most business plans include a table of contents and a cover sheet containing basic information about the company. An appendix may include a variety of documentation that supports different sections of the business plan. Among the items that may be found in an appendix are footnotes from the main plan, biographies, graphs and charts, copies of contracts and agreements, and references.
TAILORING THE BUSINESS PLAN TO SPECIFIC AUDIENCES
Business plans are organized to address major concerns and interests of their intended audience. They are commonly tailored to a specific audience by emphasizing aspects that directly relate to the interests of the reader. For example, a business plan written to obtain a loan for ongoing operations would address the major concerns of potential lenders.
BANKS, INVESTORS, AND OTHER SOURCES OF FUNDING Business plans are frequently written to obtain additional funding. Start-up capital may be needed for a new venture, or the company may require additional working capital for ongoing operations. New capital may be needed to acquire assets for expansion, or equity financing may be needed to support a company's long-range growth.
Potential lenders of debt or equity financing are usually concerned with minimizing their risks and maximizing the return on their investment. It is important, then, when composing a business plan to this audience, to make a strong financial presentation and provide adequate documentation of projected revenue and costs. Areas to be stressed in the business plan include the predictability of the company's cash flow, how well cash flow will cover debt servicing, the reasons additional funding is needed, strengths of the company's financial management, assets used to collateralize debt, and the capital and ownership structure of the company. In addition, business plans written to obtain funding for expansion provide details on the overall scope of the market and profit potential. Such plans typically enumerate the return on investment for equity investors.
POTENTIAL BUYERS Potential buyers are generally interested in such factors as the basic business concept underlying the company, its long-term viability, and its strategic position within its industry. They also look for strengths and weaknesses in the company's basic functional components and its management team. Business plans written for this audience stress the company's strengths and include contingency plans designed to overcome weaknesses, challenges, and other possible developments.
Other factors that might be emphasized in a business plan written for potential buyers are the company's ability to improve profitability and market share, the company's competitive edge, the company's potential to take advantage of opportunities in related industries, managerial and technical skills within the company, and the company's financial capacity.
PARTIES INTERESTED IN REORGANIZATION OR RESTRUCTURING Business plans written for a company reorganization may be tailored for a variety of readers, including internal management, outside creditors, or new owners. Such a plan sets forth the necessary action designed to reorganize or restructure the company to achieve greater profitability or production capacity. The business plan identifies operational changes that need to be made in different functional areas of the company. It also establishes performance and operational measures against which the functional areas of the company are evaluated.
The audience for this type of business plan is interested in such factors as the timing and sequence of specific changes, and the operational and financial impact of restructuring efforts. The business plan provides details on the new functional organization, as well as key personnel and their responsibilities. Transitional plans are typically furnished, and operating and financial goals are defined.
INTERNAL USERS Business plans written primarily for use within the company generally stress the benefits that will result from implementation of the plan. These may include improved and more consistent performance, improved coordination and consistency among various segments of the company, greater ability to measure performance, empowerment of the work force, and a better motivated and educated work force. The plan provides a comprehensive framework and direction for ongoing operations.
Business plans written for internal use typically identify the company's strengths and weaknesses, potential problems, and emerging issues. They set forth performance standards on which expectations will be based, and clearly delineate goals and objectives to allow for coordination and better communication between all company areas.
BUSINESS PLANS AS PLANNING DOCUMENTS
Business plans are not historical documents about a company's past performance. Rather, they are planning documents that provide information to decision-makers who can help the company achieve its goals and objectives. These decision-makers may be the company's own managers and executives, or they may be sources of capital or potential buyers. Regardless of the intended audience, all business plans address the fundamental strategic issues facing a business. They provide verifiable data and projections covering marketing and sales; production, service, and quality; product development; organization and management structure; and financial requirements.