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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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IT Company Business Plan: Everything You Need to Know

An IT company business plan is a detailed plan for running and developing an information technology company. 3 min read updated on September 19, 2022

An IT company business plan is a detailed plan for running and developing an information technology company. It should describe all aspects of the business, including the company's description, product description, marketing strategy, and financial analysis, in a clear and precise manner.

Tips for Writing a Great Business Plan

A business plan should set out a clear roadmap for developing and expanding your business. Keep the following points in mind while writing a business plan:

• Test your idea. Avoid the temptation of jumping into a business merely on the basis of the success stories of others. Discuss your idea with prospective customers, vendors, and other people in the industry.
• Study the market to get an idea of industry trends, underlying challenges, and scope of future growth.
• Share your business plan with your employees. It is not something to be kept confidential.
• Write it in a clear and concise manner. Be specific, and cover all areas of the business.
• Put the plan to use; simply filing it away will not serve any purpose. Refer to it whenever possible.
• Revisit and revise your plan as your business grows.

Sections of a Business Plan

A typical business plan includes the following sections:

• Executive summary.
• Description of the company.
• Market research.
• Product or service description.
• Management structure.
• Sales and marketing strategy.
• Financial Analysis.

Benefits of Writing a Business Plan

Writing down your business plan offers the following benefits, among others:

• You get to understand your business better.
• It increases the chances of your business's success.
• It makes it easier to raise capital for a startup.
• Businesses with a written plan grow at a higher rate than those without any written plan.

Steps to Writing a Startup Business Plan

1. Have a Clear Objective

• Make sure that the company description is not ambiguous. The company description can also include your business's mission statement.
• State the reason for choosing that specific business. For example, you might be prompted to open a restaurant because no other restaurants in your area serve the cuisine your restaurant specializes in.
• Discuss the vision and growth prospects of your business in brief.

The summary should be concise and should not exceed four paragraphs.

2. Identify Your Target Market

Narrow down your target market based on geography, demography, psychology, and behavior. Your final target market may look like the following:

• Ages 20 to 35
• Living in the New York area
• With an annual income of $50,000-$60,000
• Who are interested in recycling and sustainable living

3. Analyze the Competition

Perform a competition analysis and differentiate your product accordingly. Price and quality can be two important differentiating factors. You should analyze the competition while simultaneously identifying your target market since both these steps are a part of the market research section of your business plan.

4. Prepare a Budget

Estimate the amount of funds you will need to start and operate the business. Many startups fail due to lack of funds. Preparing a budget beforehand will reduce this risk. When calculating your budget, consider all possible expenses, including the following:

• Cost of equipment.
• Money required for buying or leasing property.
• Legal fees.
• Employees' salaries.
• Insurance premiums.
• Inventory cost.

5. Make Financial Projections

Prepare financial projections based on the size of your target market and your expected market share. Include the expansion strategy in your projections. Keep your projections reasonable and make sure you cover three to five years of operations.

6. Define Your Business Structure

Define the organizational structure of your business. Having a clear hierarchy of power removes unnecessary doubt and debates over jobs and reporting positions. However, avoid adding too many layers in your business structure since that may create confusion and make the communication inefficient.

7. Prepare a Marketing Plan

A well-balanced marketing plan should include a strategy for customer acquisition in line with your target market, budget, and financial projections.

Some of the basic ideas for a marketing plan include the following:

• Launching a website.
• Being active on social media.
• Building a subscribers' list.
• Setting up loyalty programs.

8. Keep It Short and Simple

Although your business plan should be detailed and thorough, make it a point to keep it short and simple. Write it professionally and avoid using jargon. Proofread the plan for grammar, readability, and confusion.

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