Business plan
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 26 February 2012.
The Meaning of Business Plan
A business plan is literally a "plan for the business," where "the business" may be a profit making company, a government organization, or a non profit organization. A business plan can also be written for a product line, an individual product, a line of service products, or some other part of a larger business entity. For companies in private industry, the heart of the business plan is a business model and business strategy which describe how and where the company expects to make and spend money.
Business plans normally look forward in time for a period of one to three years. Business plans for different organizations will differ somewhat in content and structure, but most are designed to address two fundamental kinds of questions:
- What will the business look like in one year? Two, or three years? (I.e., what will business performance look like, and what will the financial position look like?)
- How does the organization bring about the desired performance and financial position?
A company's first business plan is typically developed before start up, as a tool for supporting owner and founder requests for investment capital and/or loans to start the business. Once the business is in operation, the business plan becomes a living document, reviewed and revised on at least a quarterly basis.
• Business Plan Purpose and Uses
• A Business Plan Model: Contents of the Business Plan
• Comparison and Contrast: Business Case and Business Plan
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Business Plan Purpose and Use
The business plan normally serves a multitude of purposes, including the following. The business plan
- Projects the future financial situation and financial performance of the company, for owners, investors, and potential investors.
- Identifies and measures significant risks that would lead to different financial situations and financial performance results. The plan describes strategies for dealing with threats and mitigating risks.
- Defines or describes the company's business model, which shows where and how the company expects to spend money, bring in revenues. and make margins (gross margin, operating margin, and profit margin).
- Identifies key assumptions and trends underlying projected financial results for the company (such as trends in business volume, market demand, competitors actions, or prices of goods and services crucial to the business). These assumptions and trends are watched closely over time and updated when necessary.
- Guides management in setting and prioritizing business objectives. Provides the basis for setting key performance indicators for financial and non financial objectives and for identifying contingencies and critical success factors that must be met in order to achieve objectives.
- Serves as a starting point for developing budgets--forecasting spending and incoming revenues.
- Serves those building or evaluating business case analyses (e.g., cases to support capital acquisitions, investments, product or marketing decisions, or project proposals).
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A Business Plan Model: Contents of the Business Plan
The contents, structure, and emphasis in the business plan will be designed to address the purposes and uses that are most important to management, owners, and investors (see the previous section).
- A business plan for a start up company will be constructed especially so as to show potential investors or loan sources that the company's business prospects are good, that management is competent, that management understands the company's products, markets, and competition, that planning is solid and realistic, and that investors can expect a good return on their investment.
- A business plan for an established company that is nor performing satisfactorily will emphasize sections that show that management understands the reasons for poor business performance, that management has promising strategies and objectives in view for improving performance (e.g., changing the business model), and that management has the means and abilities to implement an improvement plan.
Business plans for government and non profit organizations, incidentally, can be very similar to business plans for private industry companies that sell goods and services. Government and non profit organizations, after all, are still charged with delivering services, still have a "market" with "customers" (a population to serve), still must create and operate within spending budgets, and still must find ways to receive funds to cover expenses.
Although the emphasis and order may be differ from business to business, a template for a business plan, or business plan model, for most businesses would almost certainly include at least some treatment of all of the following sections.
1. High level description of the business.
Describes the business of the company or organization and provides a brief history and status of the business.
2. Products and services.
Describes what the business sells or delivers. Includes a strategy for continuing or evolving products/services so as to remain competitive and grow the business. May include product, manufacturing, distribution, and service plans.
3. The Market.
Describes the market the business addresses (or the population served), including market size, market demographics, market dynamics (market growth, market maturity, or changing market demands, for instance). Also describes the and competition and competitive analysis for the market. Also includes marketing strategy and marketing plan.
4. Business location and manner of doing business.
Describes the role physical location does or does not play in the business, the manner of selling and delivering products and services (such as "brick and mortar" stores, internet sales, or mail order sales and delivery, for instance), and the role (if any) of direct sales force.
5. Management and Governance.
Describes management organization and management levels, lines of reporting and accountability, Also describes capabilities and professional experience/skills required of management.
6. Financial information
- Pro-forma (projected future) financial accounting statements for several years or more into the future (income statement, balance sheet, statement of changes in financial position, and retained earnings statement).
- Expected sources of funds, e.g., invested capital, sales revenues, loans, and other funding sources,
- Cost structure and expected uses of funds.
- Working capital requirements and expected cash inflows/outflows.
- Projected business performance and financial position financial metrics (including investment metrics, such as return on assets, leverage metrics such as the debt/equities ratio, and profitability metrics such as operating margin and profit margin.)
7. Business Strategy
Explains how the company defines and distinguishes itself from the competition, and important strategic objectives (e.g., to achieve industry leading customer satisfaction, or to successfully "brand" company product and services as design and quality leaders).
It is fair to say that the business model is the "heart" of the business plan. Or, more accurately, the business model provides the framework for describing the business and projected results, while the business plan builds on that framework to show how the company will implement its strategy to achieve good results and what they will look like. For more on the business model and business strategy, see the encyclopedia entry for business model.
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Comparison and Contrast: Business Case vs. Business Plan
The business case is organized around an action or decision, to address business case questions like those given above. Those questions contrast with the focus for the business plan, which addresses similar questions about the organization (or about the business). The business plan address questions like these:
- What will the business look like in one year? (I.e., what will its financial position and business performance look like?) What will it look like in three years?
- How does the business get to those results?
- What sales, margins, and revenues can we expect next year?
- How many years will it take this start up company to become profitable?
Confusion sometimes arises about the differences between the business case and the business plan and the ways the complement each other.
In brief, a business plan (as described above) is organized around the business (or the organization, or a part of the business). The business case is organized to address questions about a single action or decision.
Whereas the business plan asks "What will the business look like? the business case asks, "What will be the consequences (in business terms) if we take this or that action?" In contrast to the business plan questions above, the business case addresses questions like these:
Business cases are generally designed to answer questions like these about the consequences of an action or decision:
- What will be the financial consequences if we choose X or do Y?
- What important non financial outcomes can we expect in either case?
- What will we need as a capital budget next year if we decide to buy the service vehicles instead of leasing them?
- Is the investment in new phone technology justified? Is there a positive ROI?
The table below summarizes and contrasts key differences between business case and business plan.
| A Business Case.... | A Business Plan... | |
| Is organized around... | A single action or single decision and its alternatives. | An organization or the whole enterprise. The plan may cover a single product or product line or the whole organization. |
| Predicts... | Cash flow results and important non-financial impacts that follow from the action. | Business performance of the organization, especially in the main categories of the income statement. May include projected pro-forma income statements or balance sheets for future years. |
| Focuses on... | Business objectives for the action. (What the action is meant to accomplish). | Business objectives for the organization. |
| Is based on ... | A cost model and a benefits rationale, designed for the case, and applied to one or more action scenarios. | The business model for the organization (showing where and how the company makes money, similar to income statement), as well as expected trends, competitor actions, etc. |
| Measures... | Financial metrics such as NPV, IRR, ROI, payback period, and TCO, based on projected cash flow. Also includes important non-financial impacts. | Business performance in terms such as sales, margins, profits, and business "health" by contributions to important balance sheet categories |
| In a non-profit or government organization... | The scope of the case may include benefits and costs to the population served as well as the organization itself. | May focus on funding needs, budgetary requirements, and ability to operate within budget. |
A business case can support a business plan by helping answer questions like this: "How will the proposed marketing program (the action) impact our (the organization's) business performance?
A business plan can support a business case by helping case developers estimate costs and expenses, revenues, and expected changes in these areas.
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Marty J. Schmidt+ 2004 - 2012. Legal notice. Unauthorized use or publication strictly prohibited under United States and International Copyright Law. Request permission to use.
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