This article and manual provides a practical explanation of the Business Plan. After reading, you’ll have a basic understanding of this powerful management tool. In addition, this manual contains everything you need to know about business plans, tips, suggestions, and practical applications. This article also contains several downloadable and editable templates, including a business plan template, cash flow statement template and a balance sheet template.
What is a Business Plan?
An business idea scribbled on a napkin is a Business Plan. At least, it may have the basic components of a good business plan. At the core, a business plan is a document that explains what a business will be doing, and how the person who came up with it plans to make it a success. Forget the outdated notion that a Business Plan has to be a long and formal document. Companies can gain enormous advantages by defining and going through the planning process in a business plan. However, only a small subset of a formal business plan is needed to, for instance, find investors or support a commercial lone.
Most people who start writing a business plan only need a Lean Business Plan for internal use. It includes only the most important projections and basic information. It’s often based on the nine building blocks of Alexander Osterwalder‘s Business Model Canvas.
By definition, business plans are strategic documents. The current situation of a business or a business idea is explained. Next it covers how the business will get to a certain point in the future using certain resources and skills. The plan shows how the business gets from here to there. A good business plan describes the nature of the organisation, additional background information, financial projections, strategy, organisational structure, required starting capital, etc.
This article explains the traditional format of a Business Plan. The more succinct Lean business plan is based on the same building blocks.
How long should a Business Plan be?
Business plans should be short and to the point. There are two reasons for that. The first one is that nobody is interested in reading a hundred-page Business Plan. Secondly, a business plan also has to serve as a tool to help run and grow a business during its start-up. That means it’s a plan that will be referred to frequently over time. Naturally, it will also have to be adapted from time to time. A business plan that’s too long is difficult to revise.
Usually, a Business Plan is more substantial than the example of the napkin we mentioned earlier. Yet it’s still possible to create a simple business plan of just a few pages. A simple Business Plan is based on the BMC and consists of a few core areas regarding strategy, tactics, milestones, tasks, and basic financial projections.
Depending on what it will be used for, a business plan can have any length. Typically, it consists of 15 to 20 pages. However, some are sufficient with less pages, while more complex organisations may require a business plan of 100 pages or more. The length of the Business Plan strongly depends on the nature of the business. A simple concept doesn’t need a lot of words to be explained. If it’s a new business or a new industry, more explanation may be required to communicate the message.
How do I present a business plan?
A business plan should be a dynamic document that is regularly updated. It’s therefore a good idea to use a digital copy. The plan should only be printed on paper for specific occasions, such as when information has to be shared with outsiders or team members (investors and other stakeholders.
What are the three main purposes of a Business Plan?
Although a lot of information is included in a traditional business plan, the document can generally be divided into three sections. A good business plan explains the intentions of a business for the long term. It provides a clear idea of at least the following matters:
1. Business concept
The first section describes the industry, the business, the company structure, a specific product or service, and how the organisation can be made into a success.
2. The market
The second section describes the market. Potential customers are described and analysed. Who are the customers? Where are these customers? What makes these customers buy this product or service? This section also contains a competition analysis. It is required to exactly know where the company is in relation to its competitors, and how the company will have to position itself to beat them.
3. Financial situation
Finally, the business plan has a financial section. This discusses the financial side of the business. Generally it consists of income and cash flow statements, the balance sheet, different financial rations such as break-even analysis, and so on. This section may require the help of an accountant or the support of good software.
The three sections above are further subdivided into smaller building blocks for writing a business plan. Below you can read all about the various components of a traditional Business Plan.
What are the elements of a Business Plan?
The rest of this article will discuss the details of what should be included in a strong business plan. The things that are best left out are also covered. When writing your own business plan, you don’t necessarily have to follow the exact structure described in this article. It’s better to just use the sections and parts that are relevant to your business, or rather relevant to your needs.
A good business plan consists of the following elements:
- Cover page & table of contents
- Business description
- Market analysis
- Management & organisation
- Service or product description
- Marketing & sales
- Financing application
- Financial projections
How do I write a Business Plan?
Traditional business plans contain at least a combination of the ten sections described here.
1. Cover page & table of contents
Depending on the intended use of the business plan, a cover page and table of contents should be added. Especially if the business plan is to be presented to parties such as potential investors or banks, it’s important that the presented document looks professional and structured. You don’t need to spend a lot of money on a fancy design or beautiful binding. Although readers want it to look professional, they mainly care about the substance. On the cover page, list the following:
- Company name
- Contact details
- Possibly a company logo
It’s advisable to only add the cover page and the table of contents when the rest of the document is ready. This overview will give the reader a way to quickly reference information when they need to.
The first truly important part of the business plan is the summary. It’s also the first thing the reader will actually read. However, it’s still easier to write the summary after you’ve written the rest. That’s because you’ll be more familiar with the details of your business plan, meaning you’re better prepared.
In the best case, the summary can act as a stand-alone document that describes the highlights of the detailed plan. It’s very common for investors to only read the summary when assessing your business. If they like what they read in the summary, they often ask to look at the entire plan, hear a pitch, or get a thorough financial analysis. A good summary can therefore be key to encouraging the investor to keep on reading. Alternatively, they might immediately reject the plan or proposal.
Use about half a page to discuss the following aspects from your business plan:
- Describe the business, the product/service, the market, competitive edge
- Financial highlights, such as expected sales and profit figures
- Financial requirements, such as the needed capital, collateral, how financial resources will be used
- Current business position of the company, legal entity type, owners, important employees
- Important highlights or results, such as product development patents, test marketing results
3. Business description
As discussed before, it’s important to attune the business plan to the target audience. Sometimes that can mean that it’s better to leave out a certain element or section. If the Business Plan is for internal use, it’s better to replace the company description with a status update. If the plan is intended for external use such as by shareholders and investors, it’s important to take the perspective of that target audience into account. They will not be familiar with the team, the facilities, or the legal structure. Present the company as if it’s immediately able to use their financial support to get results.
What are the elements of a strong business description?
The business description generally consists of the following sections:
A brief summary of the business activities.
Add the history of the company’s founding; when and by who.
Who’s running the company? Other key players.
Organisational structure & ownership
What company structure was chosen and why. Who owns (parts of) the company?
Locations & facilities
Details about workshops, buildings, facilities, or plans to acquire these.
Mission & vision statement
A brief over view of the company’s basic principles.
4. Market analysis
A thorough market analysis helps to define prospects and with the development of a pricing, distribution, and promotion strategy that will make you company successful. Both in the short term and in the long term. In addition to the information in this chapter, also use the information that’s available in the articles on market research and market analysis.
Start by defining your market in terms of demographics, structure, growth predictions, size, trends, and potential. Also include how often your product or service will be purchased by the target group and potential annual sales. Find out next what percentage of the market you already have, or how you will conquer this market share. Keep in mind the fact that no one will ever have a 100% market share; a 30% market share would be considered dominant.
Positioning describes how your product or service sets itself apart from that of the competitor, and how it is presented to consumers. Basically, a positioning strategy helps to determine your brand or product identity in the eyes of the customer. This statement doesn’t need to be long, but you should explain the target group, how you will reach them, and what they want to buy from you. An important part of this is Value Proposition.
In terms of marketing, pricing might be the most important decision you’ll be making. There are no universal formulas for this, so it can be a challenge. There are however many methods and strategies to determine pricing.
The final component of the market analysis is a promotion strategy that explains how you will be communicating with your target group to make them aware of your products or services. In order to do this successfully, certain aspects have to be included, such as: advertising, packaging, public relations, personal sales, sales promotions, etc.
5. Competition analysis
The section on specific market characteristics and target groups is directly followed by the competition analysis. The goal of the competition analysis is to determine the following aspects:
- Who are our competitors?
- Strengths and weaknesses of the competition
- Strategies that can offer a clear competitive edge
- Barriers that can be removed to make market entry easier
- Barriers that can be used to make market entry more difficult for competitors
It’s important to identify both direct and indirect competitors. These are current competitors, but also potential future competitors that need to be anticipated. Once the competitors have been classified, you have to identify their marketing strategies and find out their strengths and weaknesses. The information that this yields will enable you to determine your unique competitive advantage.
Example of direct vs indirect competitors
When business man Henry Ford first introduced his car, there was little competition from other car manufacturers. There barely were any, after all. That’s why Henry Ford was competing with horses, bicycles, trains, and even going on foot. At first glance, this does not seem like direct competition, but they are all solutions for how people get around.
6. Management & organisation
In this part of the business plan, you tell the reader how the business will be structured, and who will be leading it. You will also describe the legal structure of the business and the type of legal entity the organisation will be registered as. Use an organisation chart for the organisational structure to show who is accountable for what in the organisation. If it’s important, you can also add the CVs of the people in key positions.
Include the following in the operational part of this element:
- Logistical structure
- Management team responsibilities
- Tasks of different divisions and units
- Capital and cost requirements for specific business activities
7. Service or product
In this section, describe what you will be selling or what service you will be offering. Explain how the business activities benefit the customer, and what the product life cycle looks like. Share any plans for intellectual property, such as patent applications or copyrights. If research & development is a regular component of business operations, provide a detailed explanation.
When describing a product or service, make sure that the readers get a clear picture of what you’re talking about. Explain how people will be using the product or service. Talk about what makes this product or service different from the ones already on the market. Be specific about what sets your company apart from the competition.
8. Marketing & sales
Having a great idea, product, or service is valuable, but consumers have to know they exist and are available. That’s why marketing plans are critical to business success. Keep in mind that marketing isn’t just advertising. Marketing, whether it refers to positioning strategies, public relations, or promotion is an investment in the growth of your business. Some parts of the marketing element in the business plan have also been included in section 4: market analysis.
The marketing section of a business plan is mostly focused on the four aspects of the marketing mix:
- What product or service will the company supply?
- What makes it better than what the competition has to offer?
- Why will people buy this?
- What price can you charge? Based on what?
- How do you balance your sales volume and price to maximise revenue?
- How is the product or service marketed?
- How are you going to advertise?
- Will there be special packaging?
- What other value-added activities have been done related to promotion?
- How is the product classified? Cheap and low-end? Or expensive and exclusive?
- What sales channels will be used? Phone? Shops? Online?
9. Financing application
If the purpose of your business plan is to convince shareholders and investors, this is where you describe your financial requirements in order to develop the organisation. You have to clearly explain how much money is needed for the next few years, and what it will be used for.
Also include what kind of financing you have in mind. For example, a loan or issuing shares. Also discuss the conditions you are willing to accept, as well as the period for the request. Be as specific as possible about how the money will be used. Capital can be used in different ways. For instance to pay salaries, buy materials or equipment, etc. Finally, include a plan for repaying debts or selling shares.
10. Financial aspects & projections
The following area of focus are the financial overviews that will be the backbone of your business. These are the profit and loss statement, the cash flow statement, and the balance sheet. These can only be reliably added when the business has been running for some time. If it’s a new business, projections will be used. It’s also important to add projections to the document about the expected profits.
Profit and loss statement
The profit and loss statement is a clear account of the organisation’s ability to generate income. Basically it’s a scorecard that tracks the financial performance of an organisation. It shows when sales transactions take place, and when costs are incurred. The information that’s included here comes from previously developed financial models, such as overviews of incomes and expenditures, depreciations, costs of goods, etc. By combining this information, you get an overview of what the company earns or loses over the period of a year.
Cash flow statement
The cash flow statement is an important financial tool for your organisation because it shows exactly how much money is needed to meet all commitments. It also explains when the money will be needed and where it will come from. The result is a profit or loss at the end of the month or year. The cash flow statement refers to both profit and loss for the coming period, showing the cumulative amount. A loss on the cash flow statement indicates that there isn’t enough cash on hand to cover all costs.
Cash flow statement template
Prepare your own cash flow statement with this editable Excel template.
The balance sheet is used to show the net value of an organisation. It is calculated by comparing assets and liabilities. If the balance sheet is being created for an existing business, the balance of the final reporting period must be included. If it’s a new company, try to make a projection of the assets and liabilities for the coming period.
Balance sheet template
With this editable Excel template you get directly access to a balance sheet worksheet with an example included.
The request for financing can be reinforced with projections. The goal of projections is to convince the reader that the company will be stable and profitable. When the company’s already operational, include the profit and loss statements of the past three to five years. This is also where a possible collateral that could be used to get a loan should be listed.
Offer financial projections for the next five years. Include expected profit and loss statements, balance sheets, and cash flow statements. Be to-the-point but specific and use quarterly figures for the first year of projections.
This component is very suitable for additional clarification of the financial aspects with graphs and charts.
In the final part of the document, you can add documents that may be of interest to the reader, such as CVs, contracts, client lists, reference letters, letters of intent, rental agreements, legal documents, tax returns, and so on. Everything that is relevant to support the business plan should be included here.
Business plan template
Use this template to create your own business plan. This templates includes all of the topics mentioned above. Available as an editable template.
Do I actually need a business plan?
Some people are convinced that, unless you’re applying for financing, you don’t actually need a business plan. It is true that a good plan is essential to find start-up capital, but a business plan is more than a basis for financing. It’s a self-written guide that helps to define and achieve company objectives.
Just like a plane would never take off without a flight plan, it’s better not to start a business without having any ideas written down in a business plan. A business plan will not automatically make your business a success, but it will help to prevent a number of common causes of failure.
While writing the business plan, you’re likely to encounter certain weaknesses that you can address. It’s also possible to discover new potential when writing a business plan, as well as opportunities to benefit from it. Only by writing a business plan can it be decided whether that one great idea is really worth the time and investment.
Now it’s your turn
What do you think? Are you familiar with this explanation of a business plan? What elements do you consider indispensable in a good business plan? What elements would you leave out for internal use? And what elements would you give extra emphasis for external use? What tools do you know that can help with developing a business plan? Do you have any tips or additional comments?
Share your experience and knowledge in the comments box below.
- Abrams, R. M. (2003). The successful business plan: secrets & strategies. The Planning Shop.
- Osterwalder, A., & Pigneur, Y. (2010). Business model canvas. Self published. Last.
- Osterwalder, A., Pigneur, Y., Bernarda, G., & Smith, A. (2014). Value proposition design: How to create products and services customers want. John Wiley & Sons.
- Mason, C., & Stark, M. (2004). What do investors look for in a business plan? A comparison of the investment criteria of bankers, venture capitalists and business angels. International small business journal, 22(3), 227-248.
- Zimmerer, T. W., & Scarboroug, N. M. (2005). Essentials of entrepreneurship and small business management. Prentice-Hall.
How to cite this article:
Janse, B. (2020). Business Plan. Retrieved [insert date] from toolshero: https://www.toolshero.com/management/business-plan/
Add a link to this page on your website:
<a href=”https://www.toolshero.com/management/business-plan/”>toolshero: Business Plan</a>
We are sorry that this post was not useful for you!
Let us improve this post!
Tell us how we can improve this post?