6.5 - Business Plan
The purpose and importance of business plans
A business plan is a formal document that sets out a business's goals and the methods it will use to reach them. It acts as a guide for decision-making and progress tracking.
Reasons for creating a business plan
- Business plans are valuable for new ventures starting out and for existing operations that need to review their direction.
- For new businesses - They help outline the initial setup, including overall strategy and resource requirements.
- For established businesses - They provide a tool to check ongoing performance against targets and make adjustments to stay aligned with objectives.
There are no strict requirements for what must be included, allowing flexibility to suit the business's specific needs. However, a well-prepared plan encourages thorough consideration of all aspects, reducing the chance of oversights.
Key components of a business plan
A business plan typically includes a range of elements that describe the business's structure, operations, and future outlook. While the exact content can vary, certain features are commonly featured to give a complete picture.
| Component | Description |
|---|---|
| Business overview | Details about the founders, their motivations, the products or services offered, and the planned location. |
| Aims and objectives | The business's broad goals and specific, measurable targets to guide progress. |
| Marketing and sales strategy | Plans for promoting and selling products or services, including target markets and pricing approaches. |
| Staffing details | Information on the people involved, such as key roles, skills, and any recruitment plans. |
| Financial forecasts | Projections including cash flow forecasts, sales forecasts, break-even analysis, and expenditure budgets. |
| Projected financial statements | Expected statement of comprehensive income (showing revenues, costs, and profits) and statement of financial position (detailing assets, liabilities, and equity). |
Timeframes for financial forecasts
Forecasts should cover different periods to show both immediate and longer-term viability:
- Short-term forecasts - Typically for the first year, focusing on initial operations and cash management.
- Medium-term forecasts - Often for the next 3-6 years, providing a view of growth and sustainability.
How business plans help secure external finance
A strong business plan is essential when seeking funding from outside sources, as it builds confidence in the business's potential.
Ways business plans support funding applications
- Demonstrating preparation - It shows that thorough research has been conducted, with all elements carefully considered.
- Highlighting viability - The plan describes the products or services and the team's capabilities, helping to convince lenders or investors of the business's strengths.
- Addressing investor priorities - For some backers, such as crowdfunding participants or business angels, factors like passion for the idea and belief in its success can be as important as financial projections.
- Projecting returns - It outlines expected profitability and timelines for when investors might receive repayments or dividends.
- Reducing perceived risks - By presenting evidence of low failure risks, the plan reassures potential funders that their investment is secure.
Additional benefits of creating a business plan
Beyond securing finance, developing a business plan offers several advantages that can improve overall business management and outcomes.
Advantages in finance and operations
- Access to diverse funding options - A solid plan can attract a broader range of financiers, increasing the chances of obtaining support.
- Securing favourable terms - It may lead to lower-cost long-term borrowing, such as loans with reduced interest rates, if forecasts demonstrate reliable repayment ability.
- Negotiating better deals - If the plan indicates high potential success and profits, investors might agree to a smaller ownership stake in exchange for their support.
- Encouraging thorough planning - The process of creating the plan compels owners to examine every detail, helping to avoid common pitfalls and supporting the idea that inadequate preparation often leads to failure.