Business plan

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.

The business goals being attempted may be for-profit or non-profit. For-profit business plans typically focus on financial goals. Non-profit and government agency business plans tend to focus on service goals, although non-profits may also focus on maximizing profit. Business plans may also target changes in perception and branding by the customer, client, tax-payer, or larger community. A business plan having changes in perception and branding as its primary goals is called a marketing plan.

Business plans may be internally or externally focused. Externally focused plans target goals that are important to external stakeholders, particularly financial stakeholders. They typically have detailed information about the organization or team attempting to reach the goals. With for-profit entities, external stakeholders include investors and customers. External stake-holders of non-profits include donors and the clients of the non-profit's services. For government agencies, external stakeholders include tax-payers, higher-level government agencies, and international lending bodies such as the IMF, the World Bank, various economic agencies of the UN, and development banks.

Internally focused business plans target intermediate goals required to reach the external goals. They may cover 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. This allows success of the plan to be measured using non-financial measures. 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. Project plans, sometimes known as project frameworks, describe the goals of a particular project. They may also address the project's place within the organization's larger strategic goals

Business Plan Content

Business plans are decision-making tools. There is no fixed content for a business plan. Rather the content and format of the business plan is determined by the goals and audience. A business plan should contain whatever information is needed to decide whether or not to pursue a goal.

For example, a business plan for a non-profit might discuss the fit between the business plan and the organization’s mission. Banks are quite concerned about defaults, so a business plan for a bank loan will build a convincing case for the organization’s ability to repay the loan. Venture capitalists are primarily concerned about initial investment, feasibility, and exit valuation. A business plan for a project requiring equity financing will need to explain why current resources, upcoming growth opportunities, and sustainable competitive advantage will lead to a high exit valuation.

Preparing a business plan draws on a wide range of knowledge from many different business disciplines: finance, human resource management, intellectual property management, supply chain management, operations management, and marketing, among others. It can be helpful to view the business plan as a collection of sub-plans, one for each of the main business disciplines.

Though business plans have many different presentation formats, business plans typically cover five major content areas:

• Background information
• A marketing plan
• An operational plan
• A inancial plan
• A discussion of the decision making criteria that should be used to approve the plan

Some of these content areas may be more or less important depending on the kind of business plan. There is no fixed content for a business plan. Rather the content and format of the business plan is determined by the goals and audience. A business plan should contain whatever information is needed to decide whether or not to pursue a goal.

The executive summary summarizes the key points of the business plan. It should define the decision to be made and the reasons for approval. The specific content will be highly dependent on the core purpose and target audience. To get a sense of the difference the purpose and target audience can make, here are three different sets of key points for an executive summary - one for a loan request, one for a start-up seeking venture finance, and one for an internal plan. Items unique to a particular kind of plan are highlighted in bold:

A loan request executive summary might contain the following information

• Company information: name of company, years in business, legal structure, minority and majority owners
• Brief description of project
• Amount and length of loan
• Objective reasons why the bank should be confident that the loan will be paid back. This likely will include
• Financial track record
• The future revenue stream
• Any contracts in place that might guarantee the revenue stream is more than just a forecast.

For a new venture, the executive summary might contain:

• Company information: name of company, proposed legal structure, current legal structure, minority and majority investors.
• Amount of investment requested
• Expected terminal value
• Description of market opportunity
• Objective reasons why the market opportunity can be exploited by this particular team

For an internal project plan, the executive summary might look like this

• Company information: not applicable
• Description of project
• Project mandate: who requested the proposal, who is being assigned to carry it out
• Strategic, tactical and financial justifications
• Summary of resources needed: staff, funds, facilities

In some cases information will overlap. For example, some of the reasons why a loan is likely to be repaid might equally as well be used as justification for the kind of extraordinary return expected by venture capitalists.

In some cases the business plan as a whole contains similar information, but for one type of plan it is mere detail and for another it is a key decision making factor. For instance, both start-ups and internal projects need staff and facilities. However the staffing and facilities needs are considered details in a plan for start-up financing. In a plan for internal projects they are key elements and, in fact, may be the only resources needed.

Marketing Plan

The marketing plan has five objectives: If the product is a new product with no existing market, one must identify all substitute products. For each significant substitute product one must explain:

• Name, features, why substitute, why proposed product better
• Switching costs and why new product justifies switching
• Expected adoption dynamics
• Expected role once market begins to develop (see above for existing products)

Pricing

• Chosen price points
• Proposed Pricing strategy

Demand Management

In economics, demand management is the art or science of controlling economic demand to avoid a recession. The term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs. An example is social security and welfare services. Rather than increasing budgets for these things, governments may develop policies that allocate existing resources according a hierarchy of need.

Distribution

• Distribution strategy
• List of major distributors
• Current status of negotiations

Promotion and Brand Development

• Promotion strategy

Operational Plan

The plan outlines how we will service our clients cost effectively

Research and Development Plan

Manufacturing/Deployment Plan

• Supply chain requirements
• Production inputs
• Facility requirements - size, layout, capacity, location
• Equipment requirements
• Warehousing needs for raw materials, finished goods
• Space requirements

Information and Communications Technology Plan

• Systems needed
• Operations: Billing, HR, SCM, CRM, Knowledge bases, etc
• Websites: internal, public
• Security and privacy requirements
• Hardware requirements
• Off-the-shelf software needed
• Custom development requirements

Staffing Plan

Staffing Needs

• List of roles
• Management structure
• For each role
• Number of employees
• Proposed compensation
• Availability

Union Issues

Training Requirements

Hiring Time Table

Staffing Budget

Business Process Outsourcing Plan

Asset Development Plan

Intellectual Property Plan

• Intellectual property inventory
• Portfolio development plan

Acquisition Plan

Some business plans gain competitive advantage by buying companies up and down the value chain. Some gain competitive advantage by buying up companies and consolidating them. Sometimes a business plan will seek to earn a superior return by adding superior management talent to an existing weak company.

For more information see Mergers and Acquisitions.

When acquisitions form a major part of the business strategy, the acquisition plan needs to be included in the business plan.

• Acquisition strategy
• Proposed acquisition targets
• Effect on market structure (if consolidation plan is being proposed)

Also, some acquisition plan will explain the basis of appointing the Liquidator of the acquisition procedures

Organizational Learning Plan

The organizational learning plan discusses what lessons will be learned from the marketing, operational, and finance plans and how those lessons will be consolidated to gain strategic advantage.

• Market sensing - organization's method for collecting information about customers (George Day)
• Strategic Staircase - the accumulation of future competencies by building on existing competencies. (Michael Hays, Costas Markides)

Cost Allocation Model

If variable costs play an important role in the business plan, it may be helpful to include a cost allocation model. This is particularly true if one has a unique business model that creates competitive advantage by transforming traditionally fixed costs into variable costs

• Fixed cost
• Variable costs

Financial Plan

For more information, see Financial plan.

Current Financing

• Key investors or owners
• Angels, friends, and family
• Existing loans and liabilities
• Terms, obligations

Funding Needs

Funding Plan

• IMF
• World Bank

Financial History

Financial Forecasts

• Sometimes called pro formas
• Balance sheet
• Income statement
• Cash flow statement
• 1-3-5-7 year projections (depends on length of project)
• For loans, repayment period determines length of projections, i.e. a six month loan doesn't need seven year forecasts
• For investments point at which returns stabilize (terminal value) determines length of forecast
• Annual, quarterly, and monthly versions should be provided
• Graphs of key values often helpful: gross revenue, EBITDA, NPV, etc.
• Financial portions of the marketing, asset development, and operations are often placed in this section rather than in the section discussing the plan. They are viewed as elaboration on the various line items in the pro-formas.

Valuation

Risk analysis

For more information, see risk analysis.

Risk Evaluation

• Market risks - lack of surgeons; large geographical area so that we don't compete against our own clients;
• New entrants to market
• Ease of entry
• Potential threat to market share- advertising companies
• Slower than expected adoption
• Operational risks
• Staffing risks- imbedding the right candidate for the right surgeon
• Availability of skilled workforce- x-pharma reps, x-equipment reps
• Union issues
• Financing risks
• Liabilities
• Poorly worded investor contracts at risk for litigation
• Investor pull-out
• Lack of follow-on funding to complete project
• Managerial risks
• Poor board or investor dynamics
• Agency risk particular to the venture

Risk Management Plan

Detailed plans are more often found as part of internal plans. Plans written for funders may need to include a high level of description if there are significant controllable risks.

• Methods and procedures to limit liabilities
• Reserve funds
• Continuity of operations plan

Decision Making Criteria

• Break even analysis
• NPV
• IRR
• Balanced Scorecard

Business

Support services

• books, portals, and other sources of written information
• consulting services
• electronic planning templates (software)
• face to face help: mentoring programs, training courses
• Australia: New Enterprise Incentive Scheme (NEIS)
• Germany: Bundesministerium für Wirtschaft und Technologie (BMWi)
• Morocco: CRI (Centre Régional d'Investisment)
• Pakistan: SMEDA (Small and medium enterprise development authority)
• UK: Business Link
• USA: SCORE, SBA centers, Small Business Development Centers
• Canada: Industry Canada,
• India : Allindialive Business Planing Portal,
• Switzerland : venturelab(Förderprogramm der Bundes für innovative Start-ups mit Wachstumspotenzial)
• Portugal: Empresa na hora (company registration and creation in one day and on-line - http://www.empresanahora.pt/)
• Other countries: needs research

Strategic Analysis

• Industry Assessment
• The macro environment
• Customer Strategy & Market Analysis
• Competitor Analysis
• Porter 5 forces analysis

Forecasts: Modeling Techniques

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 funders, customers, or strategic partners.

• an oral presentation - a hopefully entertaining slide show and oral narrative that is 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.

Revisiting the Business Plan

Cost overruns and revenue shortfalls

Cost and revenue estimates are central to any business plan for deciding the viability of the planned venture. But costs are often underestimated and revenues overestimated resulting in later cost overruns, revenue shortfalls, and possibly non-viability. During the dot-com bubble 1997-2001 this was a problem for many technology start-ups. However, the problem is not limited to technology or the private sector; public works projects also routinely suffer from cost overruns and/or revenue shortfalls. The main causes of cost overruns and revenue shortfalls are optimism bias and strategic misrepresentation. Reference class forecasting has been developed to reduce the risks of cost overruns and revenue shortfalls.

Legal and Liability Issues

Disclosure requirements

An externally targeted business plan should list all legal concerns and financial liabilities that might negatively affect investors. Depending on the amount of funds being raised and the audience to whom the plan is presented, failure to do this may have severe legal consequences.

Limitations on content and audience

Non disclosure agreements (NDAs) with third parties, non-compete agreements, conflicts of interest, privacy concerns, and the protection of one's trade secrets may severely limit the audience to which one might show the business plan. Alternatively, they may require each party receiving the business plan to sign a contract accepting special clauses and conditions.

This situation is complicated by the fact that many venture capitalists will refuse to sign an NDA before looking at a business plan, lest it put them in the untenable position of looking at two independently developed look-alike business plans, both claiming originality. In such situations one may need to develop two versions of the business plan: a stripped down plan that can be used to develop a relationship and a detail plan that is only shown when investors have sufficient interest and trust to sign an NDA.

Open Business Plans

Traditionally business plans have been highly confidential and quite limited in audience. The business plan itself is generally regarded as secret. However the emergence of free software and open source has opened the model and made the notion of an open business plan possible.

An Open Business Plan is a business plan with unlimited audience. The business plan is typically web published and made available to all.

In the free software and open source business model, trade secrets, copyright and patents can no longer be used as effective locking mechanisms to provide sustainable advantages to a particular business and therefore a secret business plan is less relevant in those models.

While the origin of the Open Business Plan model is in the free software and Libre services arena, the concept is likely applicable to other domains.

How Business Plans are Used

Venture Capital

• business plan contests - provides a way for venture capitals to find promising projects
• venture capital assessment of business plans - focus on qualitative factors such as team.

Public Offerings

• in a public offering, potential investors can evaluate perspectives of issuing company

Within Corporations

Fundraising

Fundraising is the primary purpose for many business plans, since they are related to the inherent probable success/failure of the company risk.

Total Quality Management

For more information see Total Quality Management

Management by Objective

For more information see Management by objectives

Strategic Planning

For more information see Strategic Planning

Education

K-12

Business plans are used in some primary and secondary programs to teach economic principles. Wikiversity has a Lunar Boom Town project where students of all ages can collaborate with designing and revising business models and practice evaluating them to learn practical business planning techniques and methodology.

Higher Education

• BA, MBA programs
• integrative team projects
• projects for specific course work
• Business plan contests