what is a business plan

what is a business plan

Importance of a Business Plan

1. Introduction

A feasibility study can be defined as an analysis or evaluation of the prospective business endeavor or venture. It is a thorough investigation to determine whether a given project is sound and attainable, and it has become more and more a necessity to conduct one in parallel to drawing up a business plan. While the business plan is the vision and direction of the company, the feasibility study is some sort of a fact-finding mission to ascertain the strength of the case and to highlight any potential fatal flaws that could cause the demise of the new entity. If one lacks stakeholder support or an addressable market, if the product has no competitive edge and is unlikely to last more than a few months, it is a wise decision to avoid wasting time and resources on a futile exercise. In this case, it may be that the result of the feasibility study is that the business plan is abandoned. Success in this case would not be defined as the creation of a new business, but the avoidance of a costly mistake.

The fact is that business plans do not cause success. The correct view is that success causes the business plan. Most businesses that have a business plan do so because it is a requirement imposed by a bank or an investor when finance is being sought. A bank is unlikely to require a business plan for a customer that has a good track record with their bank and a proven track record in business. The reason they are after a business plan is because they want to see what you intend to do with their money and that it will be used responsibly to generate a return that is sufficient to pay back your loan (or potentially an even greater loan) and then provide security for you to ask for more finance in the future. Business investors are more likely to require a business plan from anyone, as they will want to determine the manager’s ability to be able to think logically and make decisions to achieve a return on their investment. Creating a business plan really forces you to address yourself as to whether or not your venture is viable and whether or not it is worth pursuing.

The importance of a business plan has been a widely debated topic. Some of the great resources on the internet will tell you that business plans are vital for success, while other sites might show you studies showing that business plans are not worth the paper they are written on. Maybe because academics are removed from the realities of running a business, as they tend to have lofty theories. Business people are in the trenches every day, trying to develop and grow a business with the realization that their success is all about them. They might ask the question, “That business over there succeeded and they didn’t have a business plan, why do I need one?”

2. Benefits of a Business Plan

From the research and planning stages to the financial forecasts, this entire plan encompasses the way things will be in the future. A great benefit of the business plan is that it states the vision of the organization. According to Virtual Strategist, it is an opportunity to solidify the vision in the founder’s mind and then convey that vision to others. A well-written plan should effectively communicate your direction by use of strategy. Most importantly, the success of the business is almost entirely upon the person’s decision, and it is these strategic decisions that have the most value. So basically, if it is written effectively, it should be the business owner’s guide. Now if the business is going to be little more than a job, it does not require a business plan; however, a plan will be beneficial to any self-employed person. Business plans are not just for those looking for investment; in the matter, taking into consideration the fast pace of change today, even the smallest companies can gain a competitive edge with a plan. A business plan can be a quick easy way to jump the competition at the small business level.

Starting a business is no small decision. But despite the countless sacrifices and challenges small business owners face, many fail to take the time to plan their strategy. According to YourBusinessPal.com, the importance of a business plan is that it allows you to see your whole business as a whole and in sequence. As Richard White writes in his article, “The Importance of a Business Plan,” a business plan is essential to finding success for businesses. Just as planning a vacation only shows you your destination and how you are going to get there, a business plan will only show you where your business is going and how you will get there.

3. Key Elements of a Business Plan

3.1 The need for a business plan. 3.2 The key elements. 3.2.1 Cover page. Name of business. Names of principals. Address and phone number. Statement of purpose. Table of contents. 3.2.2 The business. Description of business. Marketing. Competition. Operating procedures. Personnel. Business insurance. 3.2.3 Financial data. Loan applications. Capital equipment and supply list. Balance sheet. Breakeven analysis. Pro-forma income projections (profit and loss statements). Three-year summary. Detail by month for the first year. Detail by quarters for the second and third years. Assumptions upon which projections were based. Pro-forma cash flow. Five-year projection. Ratio and trend analysis. 3.2.4 Supporting documents. Tax returns of principals for the last three years. Personal financial statement (all banks have these forms). Copy of proposed lease or purchase agreement for building. Copy of licenses and other legal documents. Copy of resumes of all principals. Copies of letters of intent from suppliers, etc.

4. Creating an Effective Business Plan

The development of a comprehensive business plan shows whether a business has the potential to make a profit or not. It’s a backbone and lifeline of success for any existing or future business, especially a business startup. A business plan acts as a communication tool that can be used to pitch financing to banks, venture capitalists, or angel investors. A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals. Business plans may also target changes in perception and branding by the customer, client, taxpayer, or larger community. When this sort of change is written about, it is important to clearly explain why it is being written and how it will be beneficial not only to the organization but to the consumer.

5. Conclusion

In conclusion, a business plan is essential for defining what a business is, where it is going, and how it will get there. The value of a business plan comes from its ability to succinctly articulate the core of a business and to provide a blueprint for the future. As discussed in this essay, business plans vary greatly and there is no definitive “right” way to develop one. In this essay, I have discussed the key aspects of a business plan: what it is, why businesses need one, what a business plan should contain and how it should be implemented. With these key elements, a business can be assured of having a clear, flexible and a highly effective business plan that has the best chance of succeeding in today’s volatile economic environment. There are many challenges in developing a business plan for a new business, as it creates an uncertain environment and an unrewarding risk. However, the task is essential and well worth the effort as it can save a business a huge expense and the time in the future. Businesses are more likely to succeed with a solid plan than one without. In many cases, small businesses that have failed often have had a lack of planning and a business plan. A business plan is not just a one-time document, but a dynamic tool that can be used to monitor the business progress. By the periodic reviewing of the plan, and updating its objectives and strategies, the business will always have a clear direction of success. Measures can be taken in advance to prevent potential failure; a change in direction or an increase of capital, for example. Finally, the benefits of business planning are realised through its implementation. A well-organised and realistically implemented business plan can create headway for business success.