Monday, August 20, 2018

What Is a Business Plan?

what is a business plan

This article is part of our “Business Planning Guide“—a curated list of our articles that will help you with the planning process!

What is a business plan? In its simplest form, a business plan is a guide—a roadmap for your business that outlines goals and details how you plan to achieve those goals.

In this article, I’ll explore the sections of a business plan, as well as:

To start, don’t swallow the obsolete idea that the  business plan must be a long, formal document, as if it were some term paper you have to write. That’s not true anymore. While every business has huge benefits to gain from going through the business planning process, only a small subset needs the formal business plan document required for seeking investors or supporting a commercial loan.

Most of us need just a Lean Business Plan, for internal use, with just bullet point lists and important projections. Good businesses always keep their Lean Plan up to date.

Download the Business Plan Template today!

The lean business plan is great news because it makes the planning process much less daunting. You start simple, and grow it organically. You don’t do anything that doesn’t have a business purpose, so you don’t describe your management team (to name one example) unless you need that section for outsiders. More on that in the section on the Lean Plan.

And furthermore, even for those of you who do need to produce a business plan document, the task of writing a formal business plan today is much less daunting than it used to be. These days, business plans are simpler, shorter, and easier to produce than they have ever been. Gone are the days of 30- and 40-page business plans—modern business plans are shorter, easier to write, and—thankfully—easier to read (and you could always have our MBA business plan consulting experts write a business plan for you, if you so choose).

Let’s start with the basics.

What is a business plan?

If you’ve ever jotted down a business idea on a napkin with a few tasks you need to accomplish, you’ve written a business plan—or at least the very basic components of one. At its heart, a business plan is just a plan for how your business is going to work, and how you’re going to make it succeed.

How long should your plan be?

Typically, a business plan is longer than a list on a napkin (although, as you’ll see below, it is possible—and sometimes ideal—to write your entire business plan on one page). For me in practice, and for most real businesses, it can be as simple as the Lean Plan that has a few bullet points to focus strategy, tactics, milestones to track tasks and responsibilities, and the basic financial projections you need to plan: cash flow, budget, expenses.

How should you present your business plan?

A note on format: business plans should only become printed documents on select occasions, like when you need to share information with outsiders or team members. Otherwise, they should be dynamic documents that you maintain on your computer.

The plan goes on forever, meaning that you’re constantly tweaking it, because you’re regularly evaluating your business health, so the printed version is like a snapshot of what the plan was on the day that it was printed.

What does a formal plan include?

If you do need a formal business plan document, then that includes elements like:

These are often called the “sections” or “chapters” of the business plan, and I’ll go into much greater depth about each of them below.

How often should you revise your business plan?

In all cases, the most important element of  business planning is the review schedule—set specific times to review your progress toward your goals. That’s as simple as “the third Thursday of every month” to cite one obvious example.

Specifically, it’s the time to review your progress on milestones and to compare your actuals against your financial projections. A real business plan is always wrong—hence the regular review and revisions—and never done, because the process of review and revising is vital.

Who needs a business plan?

If you’re just planning on picking up some freelance work to supplement your income, you can skip the business plan. But, if you’re embarking on a more significant endeavor that’s likely to consume a significant amount of time, money, and resources, then you need a business plan.

If you’re serious about business, taking planning seriously is critical to your success.

Unfortunately, many people think of business plans only for starting a new business or applying for business loans. But business plans are also vital for running a business—strategic planning—whether or not it needs new loans or new investments. Existing businesses should have business plans that they maintain and update as market conditions change and as new opportunities arise.

Every business has long-term and short-term goals, sales targets, and expense budgets—a business plan encompasses all of those things and is as useful to a startup trying to raise funds as it is to a 10-year-old business that’s looking to grow.

1. Startup businesses

The most classic business planning scenario is for a startup, for which the plan helps the founders break uncertainty down into meaningful pieces, like the sales projection, expense budget, milestones, and tasks.

The need becomes obvious as soon as you recognize that you don’t know how much money you need, and when you need it, without laying out projected sales, costs, expenses, and timing of payments. And that’s for all startups, whether or not they need to convince investors, banks, or friends and family to part with their money and fund the new venture.

In this case, the business plan is focused on explaining what the new company is going to do, how it is going to accomplish its goals, and—most importantly—why the founders are the right people to do the job. A startup business plan also details the amount of money needed to get the business off the ground, and through the initial growth phases that will lead (hopefully!) to profitability.

2. Existing businesses

Not all business plans are for startups that are launching the next big thing. Existing businesses use business plans to strategically manage and steer the business, not just to address changes in their markets and to take advantage of new opportunities. They use a plan to reinforce strategy, establish metrics, manage responsibilities and goals, track results, and manage and plan resources including critical cash flow. And of course they use a plan to set the schedule for regular review and revision.

Business plans can be a critical driver of growth for existing businesses. Did you know that businesses that write plans and use them to manage their business grow 30 percent faster than businesses that take a “seat of the pants” approach? A study by Professor Andrew Burke, the founding Director of the Bettany Centre for Entrepreneurial Performance and Economics at Cranfield School of Management, discovered exactly this.

For existing businesses, a robust business planning process can be a competitive advantage that drives faster growth and greater innovation. Instead of a static document, business plans in existing businesses become dynamic tools that are used to track growth and spot potential problems before they derail the business.

Choosing the right kind of business plan for your business

Considering that business plans serve many different purposes, it’s no surprise that they come in many different forms.

Before you even start writing your business plan, you need to think about who the audience is and what the goals of your plan are. While there are common components that are found in almost every business plan, such as sales forecasts and marketing strategy, business plan formats can be very different depending on the audience and the type of business.

For example, if you’re building a plan for a biotech firm, your plan will go into details about government approval processes. If you are writing a plan for a restaurant, details about location and renovations might be critical factors. And, the language you’d use in the biotech firm’s business plan would be much more technical than the language you’d use in the plan for the restaurant.

Plans can also differ greatly in length, detail, and presentation. Plans that never leave the office and are used exclusively for internal strategic planning and management might use more casual language and might not have much visual polish.

On the other end of the spectrum, a plan that is destined for the desk of a top venture capitalist will have a high degree of polish and will focus on the high-growth aspects of the business and the experienced team that is going to deliver stunning results.

Here is a quick overview of three common types of plans:

One-page business plan

A one-page business plan is exactly what it sounds like: a quick summary of your business delivered on a single page. No, this doesn’t mean a very small font size and cramming tons of information onto a single page—it means that the business is described in very concise language that is direct and to-the-point.

A one-page business plan can serve two purposes. First, it can be a great tool to introduce the business to outsiders, such as potential investors. Since investors have very little time to read detailed business plans, a simple one-page plan is often a better approach to get that first meeting. Later in the process, a more detailed plan will be needed, but the one-page plan is great for getting in the door.

This simple plan format is also great for early-stage companies that just want to sketch out their idea in broad strokes. Think of the one-page business plan as an expanded version of jotting your idea down on a napkin. Keeping the business idea on one page makes it easy to see the entire concept at a glance and quickly refine concepts as new ideas come up. Learn more about how to create a one-page business plan.

The Lean Business Plan

A Lean Plan is more detailed than a one-page plan and includes more financial information, but it’s not as long as a traditional business plan. Lean Plans are more likely to be used internally as tools for strategic planning and growth.

The Lean Business Plan dispenses with the formalities that are needed when presenting a plan externally for a loan or investment and focuses almost exclusively on business strategy, tactics, milestones, metrics, budgets, and forecasts.

These lean business plans skip sections like company history and management team since everyone in the company almost certainly knows this information. You don’t do an exit strategy section of your business plan if you’re not writing for investors and therefore you aren’t concerned with an exit.

The simplest lean business plan uses bullet points to define strategy, tactics, concrete specific dates and tasks, and essential numbers including projected sales, spending, and cash flow. It’s just five to 10 pages when printed. And few Lean Plans need printing. Leave them on the computer. Review and revise them at least once a month. The first Lean Plan takes just a few hours to do (or less), and a monthly review and revision can take only an hour or two per month.

Lean business plans are management tools used to guide the growth of both startups and existing businesses. They help business owners think through strategic decisions and measure progress towards goals.

External business plan (a.k.a the standard business plan document)

External business plans, the formal business plan documents, are designed to be read by outsiders to provide information about a business. The most common use of a full business plan is to convince investors to fund a business, and the second most common is to support a loan application. Occasionally this type of business plan is also used to recruit or train or absorb key employees, but that is much less common.

A formal business plan document is an extension of the internal business plan, or the Lean Plan. It’s mostly a snapshot of the internal plan as it existed at a certain time. But while the an internal plan is short on polish and formality, a formal business plan document should be very well-presented, with more attention to detail in the language and format. See example business plans in our sample plan library to give you an idea of what the finished product might look like.

In addition, an external plan details how potential funds are going to be used. Investors don’t just hand over cash with no strings attached—they want to understand how their funds will be used and what the expected return on their investment is.

Finally, external plans put a strong emphasis on the team that is building the company. Investors invest in people rather than ideas, so it’s critical to include biographies of key team members and how their background and experience is going to help grow the company.

What to include in your formal business plan

While we just discussed several different types of business plans, there are key elements that appear in virtually all business plans. These components include the review schedule, strategy summary, milestones, responsibilities, metrics (numerical goals that can be tracked), and basic projections. The projections include sales, costs, expenses, and cash flow.

These core elements grow organically as needed by the business for the actual business purpose.

The order doesn’t matter a whole lot, so don’t sweat having the “right” outline as long as you have an outline that works. Here’s what they normally include:

Executive summary

Just like the old adage that you never get a second chance to make a first impression, the executive summary is your business’s calling card. It needs to be succinct and hit the key highlights of the plan. Many potential investors will never make it beyond the executive summary, so it needs to be compelling and intriguing.

The executive summary should provide a quick overview of the problem your business solves, your solution to the problem, the business’s target market, key financial highlights, and a summary of who does what on the management team.

While it’s difficult to convey everything you might want to convey in the executive summary, keeping it short is critical. If you hook your reader, they’ll find more detail in the body of the plan as they continue reading. You could consider using your one-page business plan as your executive summary. And LivePlan offers an excellent alternative with what it (as of August 2018) calls the Pitch page, a standard summary.

The opportunity

One often useful section of a formal plan describes the market, including market analysis, data, projections, descriptions, and competition.

Target market

As critical as it is that your company is solving a real-world problem that people or other businesses have, it’s equally important to detail who you are selling to. Understanding your target market is key to building marketing campaigns and sales processes that work. And, beyond marketing, your target market will define how your company grows.

Market trends

Describe the most important changes happening in your target market right now. Are the needs, demographics, or preferences of potential customers changing in a notable way? Ideally, explain how those trends will favor your products or services over those of your competitors.

For example, if people in your market are increasingly using their smartphones for tasks that they used to do on a computer, perhaps the mobile app you are developing is well positioned to capture a bigger part of the market.

Market growth

Explain how your target market has been growing or shrinking in recent years. Research is key here, obviously. You can use Internet searches, trade associations, market research firms, journalists who cover your market, or other credible sources to gauge market growth. A growing market is encouraging, since it suggests stronger demand for your solution in the years to come. That said, you can still be successful in a weak or contracting market. It’s just important to acknowledge that you are swimming against the tide.

Competition

What other options do your customers have to address their needs, and what makes your solution better for them?

Execution

Products and services

The products and services section of your business plan delves into the core of what you are trying to achieve. In this section, you will detail the problem you are solving, how you are solving it, the competitive landscape, and your business’s competitive edge.

Depending on the type of company you are starting, this section may also detail the technologies you are using, intellectual property that you own, and other key factors about the products that you are building now and plan on building in the future.

Marketing and sales

The marketing and sales plan details the strategies that you will use to reach your target market. This portion of your business plan provides an overview of how you will position your company in the market, how you will price your products and services, how you will promote your offerings, and any sales processes you need to have in place.

Operations

Depending on the specifics of your business, include plans related to locations and facilities, technology, and regulatory issues.

Milestones and metrics

Plans are nothing without solid implementation. The milestones and metrics chapter of your business plan lays out concrete tasks that you plan to accomplish, complete with due dates and the names of the people to be held responsible.

This chapter should also detail the key metrics that you plan to use to track the growth of your business. This could include the number of sales leads generated, the number of page views to your web site, or any other critical metric that helps determine the health of your business.

Company overview

For external plans, the company overview is a brief summary of the company’s legal structure, ownership, history, and location. It’s common to include a mission statement in the company overview, but that’s certainly not a critical component of all business plans.

The company overview is often omitted from internal plans.

Team

The management team chapter of a business plan is critical for entrepreneurs seeking investment but can be omitted for virtually any other type of plan.

The management team section should include relevant team bios that explain why your management personnel is made up of the right people for the roles. After all, good ideas are a dime a dozen—it’s a talented entrepreneur who can take those ideas and turn them into thriving businesses.

Business plans should help identify not only strengths of a business, but areas that need improvement and gaps that need to be filled. Identifying gaps in the management team shows knowledge and foresight, not a lack of ability to build the business.

Financial plan

The financial plan is a critical component of nearly all business plans. Running a successful business means paying close attention to how much money you are bringing in, and how much money you are spending. A good financial plan goes a long way to help determine when to hire new employees or buy a new piece of equipment.

If you are a startup and/or are seeking funding, a solid financial plan helps you figure out how much capital your business needs to get started or to grow, so you know how much money to ask for from the bank or from investors.

A typical financial plan includes:

For more details on what to include in your business plan, check out our detailed business plan outline, download a business plan template in Word format, or read through our library of sample business plans so you can see how other businesses have structured their plans and how they describe their business strategy.

Using your business plan to get ahead

I mentioned earlier in this article that businesses that write business plans grow 30 percent faster than businesses that don’t plan. Taking the simple step forward to do any planning at all will certainly put your business at a significant advantage over businesses that just drive forward with no specific plans.

But just writing a business plan does not guarantee your success.

The best way to extract value from your business plan is to use it as an ongoing management tool. To do this, your business plan must be constantly revisited and revised to reflect current conditions and the new information that you’ve collected as you run your business.

When you’re running a business, you are learning new things every day: what your customers like, what they don’t like, which marketing tactics work, which ones don’t. Your business plan should be a reflection of those learnings to guide your future strategy.

This all sounds like a lot of work, but it doesn’t have to be.

Tips to extract the most value from your plan in the least amount of time

  1. Use your one-page business plan to quickly outline your strategy. Use this document to periodically review your high-level strategy. Are you still solving the same problem for your customers? Has your target market changed?
  2. Use a Lean Plan to document processes that work. Share this document with new employees to give them a clear picture of your overall strategy.
  3. Set milestones for what you plan to accomplish in the next 30 days. Assign these tasks to team members, set dates, and allocate part of your budget if necessary.
  4. Keep your sales forecast and expense budget current. As you learn more about customer buying patterns, revise your forecast.
  5. Compare your planned budgets and forecasts with your actual results at least monthly. Make adjustments to your plan based on the results.
  6. The final, most important aspect of leveraging your business plan as a growth engine is to schedule a monthly review. The review doesn’t have to take longer than an hour, but it needs to be a regular recurring meeting on your calendar. In your monthly review, go over your key numbers compared to your plan, review the milestones you planned to accomplish, set new milestones, and do a quick review of your overall strategy.

It’s easier than it sounds and can put you in that “30 percent growth” club faster than you think.



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