Business plan

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New York City skyscrapers. Midtown Manhattan looking North from the Empire State Building, 2005.

A business plan is a formal, written statement of a set of business goals, the financial background and nature of the business, and the strategy for reaching those goals. A business plan has many uses; it may be designed to enlist the support of investors and clients, to give direction to the employees within a company, to change public perception of a business, or to serve as a map against which executives and managers can evaluate their company’s progress.

A business plan typically includes a mission statement, a detailed description of the business, a marketing plan, an analysis of business conditions and competitors, information about the management structure, a financial statement outlining projected income and expenses, a projected budget, and any relevant documents. A business plan for a regular business primarily describes how the business will increase its profits. A plan for a non-profit organization or a government agency typically includes information on how the organization will fulfill its public mission as well as how it will fund its activities. It is important for the plan to be as detailed and realistic as possible. The most common error in business plans is underestimating the costs of doing business and overestimating the expected revenue. This may result in later cost overruns, revenue shortfalls, and possible non-viability.

Contents

Types of business plans

The style in which a business plan is written and the information it contains are determined by its purpose and the audience for which it is intended. A business plan may be designed to enlist the support of investors and clients (externally-focused), or it may be created to give direction to the employees within a company (internally-focused).[1] Executives and entrepreneurs use a business plan as a map against which they can evaluate their company’s progress.

A business plan for a regular business typically concentrates on financial goals and targets financial stakeholders. The business plans of non-profit organizations concentrate on service goals supported by a financial plan, and target charitable donors, clients of the non-profit’s services, and the general public.[2] The business plans of government agencies seek to enlist the support of taxpayers, higher-level government agencies, and international lending bodies such as the IMF, the World Bank, various economic agencies of the UN, and development banks.

A business plan that has strategies to build a brand or change the customers’ and the larger community’s perception of a company as its primary goal is called a marketing plan.

Internally-focused business plans target intermediate goals that must be reached in order to accomplish greater external goals. They may cover steps in the development of a new product, a new service, a new IT system, a restructuring of finance, the refurbishing of a factory or a restructuring of the organization. An internal business plan is often developed in conjunction with a balanced scorecard or a list of critical success factors that provide non-financial measures for the success of the plan. Business plans that identify and target internal goals, but provide only general guidance on how they will be met are called strategic plans.

Operational plans describe the goals of an internal organization, working group or department.[3] Project plans, sometimes known as project frameworks, describe the goals of a particular project and may also address the project's place within the organization's larger strategic goals.

Content

Business plans are decision-making tools. The content and format of a business plan should be determined by its purpose and its audience. A business plan should contain all the information necessary to decide whether or not to pursue a goal. A business plan for a bank loan should convince the bank of the organization’s ability to repay the loan. A business plan for a project requiring equity financing will need to explain why current resources, upcoming growth opportunities, and sustainable competitive advantage will result in a profit (high exit valuation) for investors. Venture capitalists are primarily concerned with the feasibility of a business and the probable returns on an initial investment. A business plan for a non-profit might discuss how the business plan will support the organization’s mission.

Preparation of a business plan requires research and access to knowledge of a wide range of business disciplines, including finance, human resource management, intellectual property management, supply chain management, operations management, and marketing. A business plan can be viewed as a collection of sub-plans, one for each of the main business disciplines.[4]

An outline for a typical business plan is:

  • Cover Sheet
  • Statement of Purpose
  • Table of Contents
  • Business
    • Description of Business: A detailed description of the business, including its legal structure, the product or service being offered, its location, the management and personnel, the business goals, and any unique aspects that will contribute to its success.
    • Marketing: A marketing plan defining the business’s target market, describing the customers, a strategy for reaching that market, and the possibilities for expanding the customer base.
    • Competition: A description of the business’s competitors and evaluation of their strengths and weaknesses.
    • Pricing and Sales: Description of the pricing structure, production costs, how pricing will be determined, and any bulk discounts that will be offered.
    • Advertising and Public Relations: A plan for promoting and advertising the product or business, description or samples of promotional materials, and advertising budget.
    • Management: Description of management structure, management personnel and their responsibilities, staffing needs, and how these needs will be met.
    • Financial Management: Projected start-up budget and operating budget, accounting and inventory systems, and financial management plan.
  • Financial Data
    • Loan applications submitted by the business
    • List of capital equipment and supplies necessary to run the business
    • Balance sheet listing assets and liabilities
    • Breakeven analysis (analysis of when the business will begin to turn a profit)
    • Profit and loss statements and cash flow statement
      • Three-year summary
      • Detail by month, first year
      • Detail by quarters, second and third years
      • Assumptions upon which projections were based
  • Supporting Documents
    • Personal financial statements and tax returns for last three years of principal officers
    • Copies of licenses and other legal documents
    • Copies of proposed leases, purchase agreements, contracts, and proposals from suppliers
    • Resumes of principal officers

Presentation formats

The format of a business plan depends on its presentation context. It is not uncommon for businesses, especially start-ups to have three or four formats for the same business plan:

  • An "elevator pitch"—a three minute summary of the business plan's executive summary. This is often used as a teaser to awaken the interest of potential investors, customers, or strategic partners.
  • An oral presentation—a hopefully entertaining slide show and oral narrative meant to trigger discussion and interest potential investors in reading the written presentation. The content of the presentation is usually limited to the executive summary and a few key graphs showing financial trends and key decision making benchmarks. If a new product is being proposed and time permits, a demonstration of the product may also be included.
  • A written presentation for external stakeholders—a detailed, well written, and pleasingly formatted plan targeted at external stakeholders.
  • An internal operational plan—a detailed plan describing planning details that are needed by management but may not be of interest to external stakeholders. Such plans have a somewhat higher degree of candor and informality than the version targeted at external stakeholders.

Legal issues and liability

An externally targeted business plan should list all legal concerns and financial liabilities that might negatively affect investors. There may be serious legal consequences if investors suffer a loss as a result of being misinformed.

Non-disclosure agreements (NDAs) with third parties, non-compete agreements, conflicts of interest, privacy concerns, and the protection of trade secrets may restrict the audience which can be allowed to see the business plan. Some organizations require each party receiving a copy of their business plan to sign an NDA contract accepting special clauses and conditions, such as a guarantee that the information will not be shared with competitors. Venture capitalists sometimes refuse to sign a NDA before looking at a business plan because of the legal liability that may arise if they are presented with two independently developed look-alike business plans that both claim originality. In such situations two versions of the business plan are developed: A stripped-down plan that does not reveal confidential information which can be used to develop a relationship, and a detailed plan which can be shown when investors have sufficient interest and trust to sign a NDA.

Open business plans

Business plans have traditionally been treated as corporate secrets, highly confidential and restricted to a limited audience. The advent of the Internet has made information widely available to the general public, and most companies now post an open business plan on their corporate Web sites. These plans often include a mission statement and information about company goals and objectives. They sometimes address company setbacks and spell out strategies for improving the company’s business performance, or explain restructuring initiatives. Open business plans are part of a company’s marketing strategy and are intended to boost investor confidence and attract customer loyalty. Financial information not revealed in an open business plan is available through public sources such as stock exchanges and the Securities and Exchange Commission.

How business plans are used

Business plans are used to solicit financing from potential investors, including venture capitalists. When a company is making a public offering of shares of its stock, interested investors can use its business plan to evaluate the future potential of the business and the risks associated with it. Business plan contests provide a way for venture capitalists to find promising projects in which to invest. In assessing business plans, venture capitalists typically look for qualitative factors, such as the education, special skills and experience of the proposed management team, which enhance the probability that the business will succeed.

Business plans are also used internally by companies to implement management strategies. In Total Quality Management (TQM), business plans are used to involve every department and every company employee in striving to realize objectives such as reduction of error and waste, and achievement of consistent quality and results. TQM business plans usually include specific procedures to be followed and objective criteria for measuring success and detecting deviation from the desired standards. Management by Objective (MBO) uses business plans to set target goals for all of a company’s business activities: Production, services, sales, research and development, human resources, finance, information systems. The business plan makes management and employees aware of these target goals and the expected results.[5]

Business plans are also an important element of strategic planning. Organizations sometimes summarize goals and objectives in a “mission statement” defining the fundamental purpose of the organization or company, or a “vision statement” defining its desired or intended future state. Business plans map the steps that must be taken to accomplish that vision. Business plans can articulate the values and policies of an organization.

In education, business plans are sometimes used in primary and secondary programs to teach economic principles.[6] Students in BA and MBA programs are often asked to create business plans, sometimes as part of an integrative team project, as part of their coursework.

Writing a business plan

A large corporation may involve a large number of experts in different fields in the writing of a business plan, including accountants, marketing consultants, lawyers, business analysts and personnel managers. Individual entrepreneurs and small businesses can find many resources to assist them including books and guides, consulting services, financial advisers, community college business courses, and vast amounts of information on the Internet. In the United States, the U.S. Small Business Administration (SBA),[7] partners with programs such as SCORE "Counselors to America's Small Business,"[8] a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business, and Small Business Development Centers[9] nationwide to provide free consultation, advice, and assistance to small business owners. Many nations have similar services offered by the government.

Often the process of writing a business plan helps a company to develop a viable business model and to identify potential pitfalls that might cause a business to fail. It is important to make the plan as detailed, and as realistic, as possible in order to arrive at a correct understanding of the business. A good plan focuses on short-term objectives rather than long-term projections, defining what can be accomplished in the next few months rather than ten years ahead. Once it is operating, the reality of a business may be quite different from the original concept, making long-term projections meaningless.[10] A business plan can be revised regularly to reflect the actual circumstances of the business. A good plan also identifies weaknesses of the organization and possible obstacles to the business, and develops alternative strategies to deal with them.

The most common error in business plans is underestimating the costs of doing business and overestimating the expected revenue. This may result in later cost overruns, revenue shortfalls, and possible non-viability. Even experienced professional financial analysts are subject to “optimism bias," the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. Strategic misrepresentation, the planned, systematic distortion or misstatement of fact (lying) in response to incentives in the budget process, is a common cause of cost overruns, particularly in public works projects.[11][12] Reference class forecasting, a process using statistical evaluation of the outcomes of previous actions, similar to the one being planned, to make a realistic forecast, has been developed to reduce the risk of cost overruns and revenue shortfalls.

See also

Notes

  1. Business Notes, Small Business Administration (SBA) Business Plan Outline. Retrieved November 26, 2008.
  2. Center for Nonprofit Excellence, Nonprofit Business Planning—A Path to Sustainability. Retrieved November 26, 2008.
  3. State of Louisiana, Operational Plan: Format, Guidelines and Instructions. Retrieved November 26, 2008.
  4. Eric S. Siegel, Brian R. Ford, Jay M. Bornstein, The Ernst & Young Business Plan Guide (New York: John Wiley and Sons, 1993, ISBN 0471578266).
  5. Peter F. Drucker, The Practice of Management (1954, ISBN 0060110953).
  6. Economics Pennsylvania, Our Programs. Retrieved November 26, 2008.
  7. SBA, About SBA. Retrieved November 26, 2008.
  8. Score, About SCORE. Retrieved November 26, 2008.
  9. Small Business Development Centers, Overview. Retrieved November 26, 2008.
  10. My Own Business, Business Plan. Retrieved November 26, 2008.
  11. Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl (2002), "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association 68(3): 279-295. Retrieved November 26, 2008.
  12. Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl (2005), "How (In)accurate Are Demand Forecasts in Public Works Projects?" Journal of the American Planning Association 71 (2): 131-146. Retrieved November 26, 2008.

References

  • Drucker, Peter F. The Practice of Management. New York: Harper, 1954. ISBN 0060110953.
  • Flyvbjerg, Bent, Mette K. Skamris Holm, and Søren L. Buhl. 2005, "How (In)accurate Are Demand Forecasts in Public Works Projects?" Journal of the American Planning Association 71 (2).
  • Ford, Brian R., Jay Bornstein, Patrick T. Pruitt, and Eric S. Siegel. The Ernst & Young Business Plan Guide. Hoboken, NJ: J. Wiley & Sons Inc. 2007. ISBN 9780470112694.
  • McKeever, Mike P., Lisa Goldoftas, and Mike P. McKeever. How to Write a Business Plan. Berkeley, CA: Nolo Press, 1992. ISBN 9780873371841.
  • Pinson, Linda. Anatomy of a Business Plan: A Step-by-Step Guide to Building a Business and Securing Your Company's Future. Chicago, IL: Dearborn Trade Pub, 2001. ISBN 9780793146000.
  • Siegel, Eric S., Brian R. Ford, Jay M. Bornstein. The Ernst & Young Business Plan Guide. New York: John Wiley and Sons, 1993. ISBN 0471578266.

External links

All links retrieved March 21, 2013.

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