What’s it: A business plan is a detailed document about strategies for achieving the business’s mission and objectives. It also explains what the company should look like in the next few years.
For startups, business planning is the first step before running a business or getting a capital injection. It’s usually a short-term plan, say for a year.
For an established company, the business plan establishes business goals over the next several periods, often three, five, or ten years. Specifically, we refer to it as a corporate plan.
For this article, I will specifically discuss the business plans of new companies or startups.
Purposes of a business plan
Business planning is an essential step before executing any business strategy. Companies create them to help them consider all the elements they need for their business to be successful.
A business plan is essential to fulfilling several purposes, such as:
- Set a focus
- Exploiting potential opportunities and minimizing risks
- Get funding or capital
Set business focus
The business plan provides a guide for what to do in the future. It serves as roadmaps and guides to help businesses focus and pursue success.
The entrepreneur explains the goals, steps, and how the business achieves success and creates value. In it, you will find detailed outlines of how the business will achieve each step.
Maximizing opportunities and minimizing risks
The startup describes every aspect of the business, including the opportunities and risks faced in the future. By identifying them, they can develop strategies and tactics to maximize opportunities and minimize risks.
For startups, such identification is increasingly essential. They face higher uncertainty than established companies. Therefore, business planning reduces the risk of failure in the early years.
Entrepreneurs discuss not only internal environment aspects such as how to manufacture and design products but also the external environment. They must understand the market, potential customers, business locations, and competitive conditions. They then conduct market research to answer questions, why the company exists, and its aims and objectives.
Also, companies use market research inputs to develop appropriate strategies and tactics, including plans for product development, production, marketing, distribution, and finance.
One of the critical financial aspects to minimize risk is the cash flow forecast. Entrepreneurs predict how much money will come in and go out over the next few years.
The early years of doing business are crucial periods. Startups usually still rely on external funding. Sales are still not generating enough cash flow to finance operating activities.
Get funding or capital
Banks or potential business investors will look at the business plan before deciding to inject funds or capital. The entrepreneurs assure the capital supplier why the business will be successful and why they should provide funds.
Some successful entrepreneurs convince capital suppliers. Others failed.
By looking at the business plan, capital suppliers want to make sure they don’t lose money. Therefore, they weigh the potential risks and returns before deciding to give money. They make sure they will get more money by funding the company.
Capital suppliers may perceive the business as too risky and outside their tolerance. So, they decided not to be willing to lend money.
Business plan components
The business plan must provide detailed information and analysis of all relevant business aspects, including management, competitive position, markets, activities, products, policies, and financial projection.
For new businesses, the content structure of the business plan usually covers:
- Executive summary – overview of the business and its strategy.
- Mission statement – a brief statement of why the business exists and for what purpose.
- Business environment overview – a detailed overview of the industry background, what is sold, current and potential market size, and the competition map.
- Business operations overview – details marketing plans, teams and management, operations, and information technology systems.
- Financial projections – about future sales, costs, profits, and cash flows.
Example of a business plan
You may find a variety of business plan formats. And, here, I will present the format according to the previous discussion.
In this section, the entrepreneur provides a concise explanation of the new business and why it will be successful. Also, entrepreneurs try to convince investors why they should fund a business.
Investors often focus on the executive summary. They had little time to read pages of documents. When they are interested in this section, they are likely willing to read the next section.
In this section, the entrepreneur usually includes some information such as mission, products and services, target market, business location, team and management, financial information, and growth plans.
The mission statement helps answer the question of why new business is coming. Unlike other sections, the content in this section is usually concise. Apart from the mission, the entrepreneur might also provide some details about his short-term goals ahead.
Overview of the business environment
Entrepreneurs provide detailed information about the market in which the company will operate. They then outline opportunities through market and competition analysis. They also provide information about business challenges to inform investors about the risks inherent in the business.
Some of the content in this section includes:
- Target consumers
- Current and potential market size
- Market trends
- Market growth rate
- Competition, for example, uses Porter’s Five Forces approach
- Market profitability
- Industry cost structure
- Distribution channel
- Key success factors
Overview of business operations
Entrepreneurs provide detailed information about new businesses. They outline strategies and tactics for exploiting opportunities and minimizing risks. They also explain the competitive advantage to support business success. They then detail various aspects of the business function.
First, about organization and management. The entrepreneur explains how the company is structured and who will run it. What is a legal business entity, whether in a corporation or a general or limited partnership?
Then, the entrepreneur defines who is responsible for operating the business. It may also include information about key employees and unique experiences contributing to the business’s success going forward. In the appendix, they can include CV information in more detail.
Second, the product. Entrepreneurs explain what products they offer, why the products are successful and profitable, and why customers will buy them. They make clear and compelling statements about the value proposition that a new business brings to the market and why it does it better than other products.
They also explain other aspects such as product design and development, main product features, price, copyright or patent applications, and research and development details.
Third, marketing and sales. Entrepreneurs provide detailed information about how they will sell the product. They explain how to attract and retain customers. Other aspects are customer segments, pricing strategy, advertising campaigns, distribution channels, packaging, and customer support. They relate it all to the opportunities and challenges they have presented before.
Fourth, production and operation. In this section, the entrepreneur describes detailed aspects of production and other operating activities, including:
- Primary activities: production facilities, technology, production sites, access to raw materials, and logistics network.
- Supporting activities: accounting and finance, human resource development, information technology development, and procurement.
- Key partners: suppliers, media, subcontractors, and distributors
In this section, the entrepreneur outlines the projected results of operations and funding requirements, usually for the next three or five years. It explains various aspects of business finance, such as:
- Revenue: number of customers, customer growth, price, sales volume, and market share. If the entrepreneur targets several market segments, they must break down each of these indicators by segment.
- Costs: raw materials, labor, marketing, general administration, and funding costs.
- Target capital structure: composition of debt and equity.
- Profit: product profit margin, gross profit, operating profit, financing costs, taxes, and net income.
- Cash flow: net income, working capital, depreciation, and capital expenditure budget.
Where available, entrepreneurs should study details about industry norms and competitor financial reports to provide insight into projecting finances.
Furthermore, the entrepreneur explains the future funding plan, including about:
- Target capital structure, a combination of debt and equity
- The number of funds required and details of their use
- Funding requirements
- Return on capital includes debt servicing and projected rate of return on capital.
Employers use the appendix to provide supporting documents or other materials discussed in the previous section.