What Is a Business Plan?

A business plan is a written document that describes in detail how a business—usually a new one—is going to achieve its goals. A business plan lays out a written plan from a marketing, financial and operational viewpoint.

Business plans are important to allow a company to lay out its goals and attract investment. They are also a way for companies to keep themselves on track going forward.

Although they're especially useful for new companies, every company should have a business plan. In some cases, Sometimes, a business plan is prepared for an established business that is moving in a new direction.

Understanding Business Plans

A business plan is a fundamental tool any startup business needs to have in place prior to beginning its operations. Usually, banks and venture capital firms make a viable business plan a prerequisite to the investment of funds in a business.

Even though it may work, operating without a business plan is not a good idea. In fact, very few companies are able to last without one. There are definitely more benefits to creating and sticking to a business plan including being able to think through ideas without putting in too much money into them—and ultimately losing in the end.

A good business plan should outline all the costs and the downfalls of each decision a company makes. Business plans, even among competitors in the same industry, are rarely identical. But they all tend to have the same elements including an executive summary of the business and includes a detailed description of the business, its services and/or products. It also states how the business intends to achieve its goals.

The plan should include at least an overview of the industry of which the business will be a part, and how it will distinguish itself from its potential competitors.

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Want Funding? You Need a Business Plan

Elements of a Business Plan

As mentioned above, no two business plans are the same. But they all have the same elements. Here are some of the common and most important parts of a business plan:

Executive Summary: This section outlines the company and includes the mission statement along with any information about the company's leadership, employees, operations, and location.

Products and Services: Here, the company can outline the products and services it will offer, and may also include pricing, product lifespan, and benefits to the consumer. Other factors that may go into this section include production and manufacturing processes, any patents the company may have, as well as proprietary technology. Any information about research and development (R&D) can also be included here.

Market Analysis: A firm needs a good handle of the industry as well as its target market. It will outline the competition and how it factors in the industry, along with its strengths and weaknesses.

Marketing Strategy: This area describes how the company will attract and keep its customer base and how it intends to reach the consumer. This means a clear distribution channel must be outlined.

Financial Planning: In order to attract the party reading the business plan, the company should include any financial planning and/or projections. Financial statements, balance sheets, and other financial information may be included for already-established businesses. New businesses may include targets for the first few years of the business and any potential investors.

Budget: Any good company needs to have a budget in place. This includes costs related to staffing, development, manufacturing, marketing, and any other expenses related to the business.

Types of Business Plans

Business plans help companies identify their objectives and remain on track. They can help companies start and manage themselves, and to help grow after they're up and running. They also act as a means to get people to work with and invest in the business.

Although there are no right or wrong business plans, they can fall into two different categories—traditional or lean startup. According to the Small Business Administration, the traditional business plan is the most common. They are standard, with much more detail in each section. These tend to be much longer and require a lot more work.

Lean startup business plans, on the other hand, use a standard structure even though they aren't as common in the business world. These business plans are short—as short as one page—and have very little detail. If a company uses this kind of plan, they should expect to provide more detail if an investor or lender requests it.

[Important: While it's a good idea to give as much detail as possible, it's also important to be sure the plan is concise so the reader will want to get to the end.]

Key Takeaways

  • A business plan is a written document describing how businesses—both new and established—plan to achieve their goals.
  • Businesses may come up with a lengthier traditional business plan or a shorter lean startup business plan.
  • Good business plans should include an executive summary, products and services, financial planning, marketing strategy and analysis, financial planning, and a budget.

Financial Projections

A complete business plan must include a set of financial projections for the business. These forward-looking projected financial statements are often called pro-forma financial statements or simply the "pro-formas." They include the overall budget, current and projected financing, a market analysis, and its marketing strategy approach.

In a business plan, a business owner projects revenues and expenses for a certain period of time and describes the operational activity and costs related to the business.

Considerations for a Business Plan

The idea behind putting together a business plan is to enable owners to have a more defined picture of potential costs and drawbacks to certain business decisions and to help them modify their structures accordingly before implementing these ideas. It also allows owners to project what type of financing is required to get their businesses up and running.

The length of the business plan varies greatly from business-to-business. All of the information should fit into a 15- to 20-page document. If there are crucial elements of the business plan that take up a lot of space—such as applications for patents—they should be referenced in the main plan and included as appendices.

If there are any especially interesting aspects of the business, they should be highlighted and used to attract financing. For example, Tesla Motors.'s electric car business essentially began only as a business plan.

A business plan is not meant to be a static document. As the business grows and evolves, so too should its business plan. An annual review of the plan allows an entrepreneur to update it when taking markets into consideration. It also provides an opportunity to look back and see what has been achieved and what has not.