Business plan
Encyclopedia
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, tax-payer, or larger community. When the existing business is to assume a major change or when planning a new venture - a 3 to 5 year business plan is required since investors will look for their annual return in the 3 to 5 year time.
, the World Bank
, various economic agencies of the United Nations
, 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 plan
s describe the goals of an internal organization, working group or department. Project plan
s, 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.
For example, a business plan for a non-profit might discuss the fit between the business plan and the organization’s mission. Bank
s 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.
"... a good business plan can help to make a good business credible, understandable, and attractive to someone who is unfamiliar with the business. Writing a good business plan can’t guarantee success, but it can go a long way toward reducing the odds of failure."
Typical structure for a business plan for a start up venture
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 and thus generate more accurate business plans.
, 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.
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.
.
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.
The primary difference between profit and non-profit organizations is that "for-profit" organizations look to maximize wealth versus non-profit organizations, which look to provide a greater good to society. In non-profit organizations, creative tensions may develop in the effort to balance mission with "margin" (or revenue
).
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
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, tax-payer, or larger community. When the existing business is to assume a major change or when planning a new venture - a 3 to 5 year business plan is required since investors will look for their annual return in the 3 to 5 year time.
Audience
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 International Monetary FundInternational Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, various economic agencies of the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
, and development banks
Multilateral Development Bank
A multilateral development bank is an institution, created by a group of countries, that provides financing and professional advising for the purpose of development. MDBs have large memberships including both developed donor countries and developing borrower countries...
.
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
Balanced scorecard
The Balanced Scorecard is a strategic performance management tool - a semi-standard structured report, supported by proven design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the...
or a list of critical success factors
Critical success factor
Critical success factor is the term for an element that is necessary for an organization or project to achieve its mission. It is a critical factor or activity required for ensuring the success of a company or an organization. The term was initially used in the world of data analysis, and business...
. 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
Strategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...
.
Operational plan
Operational plan
Operational plan is a term that can be used for* Military purposes, see Operation plan or "OPLAN"* Business purposes, see Business operations* Operational planning, see operational planning...
s describe the goals of an internal organization, working group or department. Project plan
Project planning
Project planning is part of project management, which relates to the use of schedules such as Gantt charts to plan and subsequently report progress within the project environment....
s, 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.
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 represents all aspects of business planning process declaring vision and strategy alongside sub-plans to cover marketing, finance, operations, human resources as well as a legal plan, when required. A business plan is a summary of those disciplinary plans.For example, a business plan for a non-profit might discuss the fit between the business plan and the organization’s mission. Bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s 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
Sustainable competitive advantage
Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment....
will lead to a high exit valuation.
Preparing a business plan draws on a wide range of knowledge from many different business disciplines: finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, human resource management
Human resource management
Human Resource Management is the management of an organization's employees. While human resource management is sometimes referred to as a "soft" management skill, effective practice within an organization requires a strategic focus to ensure that people resources can facilitate the achievement of...
, intellectual property management, supply chain management
Supply chain management
Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
, operations management
Operations management
Operations management is an area of management concerned with overseeing, designing, and redesigning business operations in the production of goods and/or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as little resources as needed, and...
, and marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
, 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.
"... a good business plan can help to make a good business credible, understandable, and attractive to someone who is unfamiliar with the business. Writing a good business plan can’t guarantee success, but it can go a long way toward reducing the odds of failure."
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.
Typical structure for a business plan for a start up venture
- cover page and table of contents
- executive summaryExecutive summaryAn executive summary, sometimes known as a management summary, is a short document or section of a document, produced for business purposes, that summarizes a longer report or proposal or a group of related reports, in such a way that readers can rapidly become acquainted with a large body of...
- business description
- business environment analysis
- industry backgroundIndustry informationIndustry classification or industry taxonomy organizes companies into industrial groupings based on similar production processes, similar products, or similar behavior in financial markets....
- competitor analysisCompetitor analysisCompetitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats...
- market analysisMarket analysisA market analysis studies the attractiveness and the dynamics of a special market within a special industry. It is part of the industry analysis and this in turn of the global environmental analysis. Through all these analyses the chances, strengths, weaknesses and risks of a company can be...
- marketing planMarketing planA marketing plan may be part of an overall business plan.Solid marketing strategy is the foundation of a well-written marketing plan. While a marketing plan contains a list of actions, a marketing plan without a sound strategic foundation is of little use....
- operations plan
- management summary
- financial planFinancial planIn general usage, a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or...
- attachments and milestones
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 bubbleDot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
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
Optimism bias
Optimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...
and strategic misrepresentation
Strategic misrepresentation
"Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...
. Reference class forecasting
Reference class forecasting
Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
has been developed to reduce the risks of cost overruns and revenue shortfalls and thus generate more accurate business plans.
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 interestConflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
, privacy concerns
Privacy
Privacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively...
, 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
Free software
Free software, software libre or libre software is software that can be used, studied, and modified without restriction, and which can be copied and redistributed in modified or unmodified form either without restriction, or with restrictions that only ensure that further recipients can also do...
and open source
Open source
The term open source describes practices in production and development that promote access to the end product's source materials. Some consider open source a philosophy, others consider it a pragmatic methodology...
has opened the model and
made the notion of an open business
Open business
Open business represents a concept of doing business in a transparent way by intimately integrating an ecosystem of participants, collaborating in public space....
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
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
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.
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.
- The better the business plan, the better your chances of landing that big initial investment.
Fundraising
Fundraising is the primary purpose for many business plans, since they are related to the inherent probable success/failure of the company riskRisk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
.
Total quality management
Total quality management (TQM) is a business management strategy aimed at embedding awareness of quality in all organizational processes. TQM has been widely used in manufacturing, education, call centers, government, and service industries, as well as NASA space and science programs.Management by objective
Management by objectives (MBO) is a process of agreeing upon objectives within an organization so that management and employees agree to the objectives and understand what they are in the organization.Strategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. Various business analysis techniques can be used in strategic planning, including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) and PEST analysis (Political, Economic, Social, and Technological analysis) or STEER analysis involving Socio-cultural, Technological, Economic, Ecological, and Regulatory factors and EPISTELS (Environment, Political, Informative, Social, Technological, Economic, Legal and Spiritual).K-12
Business plans are used in some primary and secondary programs to teach economic principles. WikiversityWikiversity
Wikiversity is a Wikimedia Foundation project, which supports learning communities, their learning materials, and resulting activities. It differs from more structured projects such as Wikipedia in that it instead offers a series of tutorials, or courses, for the fostering of learning, rather than...
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.
Not for profit businesses
The business goals may be defined both for non-profit or for-profit organizations. For-profit business plans typically focus on financial goals, such as profit or creation of wealth. Non-profit, as well as government agency business plans tend to focus on the "organizational mission" which is the basis for their governmental status or their non-profit, tax-exempt status, respectively—although non-profits may also focus on optimizing revenue.The primary difference between profit and non-profit organizations is that "for-profit" organizations look to maximize wealth versus non-profit organizations, which look to provide a greater good to society. In non-profit organizations, creative tensions may develop in the effort to balance mission with "margin" (or revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
).
Satires
The business plan is the subject of many satires. Satires are used both to express cynicism about business plans and as an educational tool to improve the quality of business plans. For example,- Five Criteria for a successful business plan in biotech uses DilbertDilbertDilbert is an American comic strip written and drawn by Scott Adams. First published on April 16, 1989, Dilbert is known for its satirical office humor about a white-collar, micromanaged office featuring the engineer Dilbert as the title character...
comic strips to remind people of what not to do when researching and writing a business plan for a biotech start-up. Scott Adams, the author of Dilbert, is an MBAMaster of Business AdministrationThe Master of Business Administration is a :master's degree in business administration, which attracts people from a wide range of academic disciplines. The MBA designation originated in the United States, emerging from the late 19th century as the country industrialized and companies sought out...
graduate (U.C. Berkeley) who sees humor as a critical tool that can improve the behavior of businesses and their managers. He has written numerous critiques of business practices, including business planning. The website Dilbert.com - Games has a mission statement generator that satirizes the wording often found in mission statements. His book The Dilbert Principle – A Cubicle’s Eye View of Bosses, Meetings, Management Fads & Other Workplace AfflictionsThe Dilbert PrincipleThe Dilbert principle refers to a 1990s satirical observation by Dilbert cartoonist Scott Adams stating that companies tend to systematically promote their least-competent employees to management , in order to limit the amount of damage they are capable of doing...
discusses the foibles of management and their plans as depicted in the DilbertDilbertDilbert is an American comic strip written and drawn by Scott Adams. First published on April 16, 1989, Dilbert is known for its satirical office humor about a white-collar, micromanaged office featuring the engineer Dilbert as the title character...
comic strips by Scott AdamsScott AdamsScott Raymond Adams is the American creator of the Dilbert comic strip and the author of several nonfiction works of satire, commentary, business, and general speculation....
.
- In the article "South Park's" Investing Lesson, The Motley Fool columnist "Fool on the Hill" uses the Underpants GnomesGnomes (South Park episode)"Gnomes" is the seventeenth episode of the second season of the animated television series South Park, and the 30th episode of the series overall. "Gnomes" originally aired in the United States on December 16, 1998 on Comedy Central. This episode marks the first appearance of Tweek and his...
to illustrate the fallacy of focusing on goals without a clear implementation strategy. The Underpants Gnomes episode satirizes the business plans of the Dot-comDot-com bubbleThe dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
era.
See also
- Business caseBusiness caseA business case captures the reasoning for initiating a project or task. It is often presented in a well-structured written document, but may also sometimes come in the form of a short verbal argument or presentation. The logic of the business case is that, whenever resources such as money or...
- Corporate financeCorporate financeCorporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
- Cost overrunCost overrunA cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...
- Cost-benefit analysisCost-benefit analysisCost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
- Marketing planMarketing planA marketing plan may be part of an overall business plan.Solid marketing strategy is the foundation of a well-written marketing plan. While a marketing plan contains a list of actions, a marketing plan without a sound strategic foundation is of little use....
- Optimism biasOptimism biasOptimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...
- Parkinson's Law of Triviality
- Reference class forecastingReference class forecastingReference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
- Revenue shortfall
- Strategic plan
- Business Motivation ModelBusiness Motivation ModelThe Business Motivation Model in enterprise architecture provides a scheme and structure for developing, communicating, and managing business plans in an organized manner...