→ A business plan is a written document that describes a business idea, its objectives and how the business intends to operate and achieve those objectives.
→ It provides a structured plan for starting and developing a business.
→ A business plan is particularly important for a new business, but established businesses may also use business plans when launching new products, entering new markets or expanding.
Purpose of a Business Plan
→ Turn a business idea into a structured plan
→ The entrepreneur sets out what the business will do and how it will operate.
→ Set business objectives
→ The plan identifies what the business wants to achieve, such as survival, profit, growth or a particular market share.
→ Identify the target market
→ It explains who the customers are and what their needs are.
→ Plan marketing activities
→ It sets out decisions about product, price, promotion and place.
→ Plan operations
→ It identifies resources, employees, premises, equipment and suppliers needed.
→ Estimate financial requirements
→ It shows how much finance may be required and how the business intends to obtain it.
→ Forecast financial performance
→ Sales, costs, cash flow and profit can be estimated.
→ Identify possible problems
→ Planning can help the entrepreneur identify risks and consider how they might be managed.
→ Communicate the business idea
→ A business plan can be presented to banks, investors or other potential sources of finance.
Key Elements of a Business Plan
The exact contents can vary depending on the business, but a business plan commonly includes the following.
Business Idea
→ Describes the product or service the business intends to provide.
→ Explains the customer need or market opportunity being targeted.
Example:
→ A business plans to provide affordable healthy meals through an online delivery service.
Business Objectives
→ States what the business wants to achieve.
Examples:
→ Survival
→ Profit
→ Growth
→ Increased market share
→ Entering a new market
→ Objectives should be realistic and provide direction for decision-making.
Market Analysis
→ Provides information about the market in which the business will operate.
→ Market size
→ Market growth
→ Customer characteristics
→ Customer needs and preferences
→ Competitors
→ Market trends
→ This information may come from primary and secondary market research.
Target Market
→ Identifies the particular group of customers the business intends to serve.
→ Age
→ Income
→ Location
→ Gender
→ Lifestyle
→ Buying behaviour
Example:
→ A premium sportswear business may target customers with relatively high disposable incomes who regularly participate in fitness activities.
Marketing Plan
→ Explains how the business intends to attract and retain customers.
→ Product → features, quality, branding and packaging
→ Price → pricing method and selling price
→ Promotion → advertising, social media and sales promotion
→ Place → where and how the product will be sold
Operations Plan
→ Explains how the goods or services will be produced and delivered.
→ Location
→ Production methods
→ Equipment
→ Technology
→ Suppliers
→ Inventory
→ Quality
→ Capacity
Human Resource Plan
→ Identifies the employees the business will need.
→ Number of employees
→ Skills and qualifications
→ Recruitment
→ Training
→ Responsibilities
→ Wage costs
Management Structure
→ Identifies who will be responsible for important business decisions.
→ It may include the entrepreneur, managers and other key employees.
→ Clear responsibilities can help coordinate business activities.
Financial Plan
→ Shows the financial requirements and expected financial performance of the business.
→ Start-up costs
→ Sources of finance
→ Sales revenue forecast
→ Costs
→ Cash-flow forecast
→ Profit forecast
→ Break-even analysis
→ Financial forecasts help determine whether the business idea appears financially viable.
Risk Analysis
→ Identifies possible risks and how the business could respond.
Examples:
→ Competitor enters the market → improve product differentiation
→ Sales lower than expected → reduce unnecessary costs
→ Supplier failure → identify alternative suppliers
→ Cash-flow shortage → arrange suitable finance
Benefits of Business Plans
Helps the Entrepreneur Make Decisions
→ Preparing a business plan forces the entrepreneur to think carefully about the business idea.
→ This can make decisions about pricing, marketing, finance and operations more structured.
Identifies Financial Requirements
→ A business plan can estimate how much finance is needed.
→ Estimated costs → finance requirement identified → suitable sources of finance considered
→ This is particularly important during business start-up.
Helps Obtain Finance
→ Banks and investors may want evidence that an entrepreneur has considered the business carefully.
→ A detailed business plan can communicate the business idea, expected sales, costs and financial requirements.
→ However, a business plan does not guarantee that finance will be provided.
Sets Clear Objectives
→ Business objectives provide direction for managers and employees.
→ They can also provide standards against which actual performance can later be compared.
Helps Identify Problems
→ Forecasting may reveal potential problems before the business starts.
Example:
→ A cash-flow forecast shows a shortage of cash in the third month.
→ The entrepreneur can investigate ways to reduce the shortage before it occurs.
Reduces Some Uncertainty
→ Research and forecasting provide information about customers, competitors, costs and expected revenue.
→ Better information can reduce some uncertainty.
→ It cannot eliminate uncertainty because future conditions can change.
Provides a Basis for Monitoring Performance
→ Actual results can be compared with the forecasts in the business plan.
→ Actual sales below forecast → investigate reasons → change marketing/pricing/operations if necessary
Helps Coordinate Business Activities
→ Marketing, finance, human resources and operations can be planned together.
→ This can reduce conflicting decisions between different parts of the business.
Helps Communicate the Business Idea
→ The entrepreneur can use the plan to explain the business to:
→ banks
→ investors
→ potential partners
→ managers
→ employees
Limitations of Business Plans
Forecasts May Be Inaccurate
→ Sales, costs, interest rates and economic conditions are difficult to predict accurately.
→ If assumptions are wrong, the financial forecasts may be unreliable.
Example:
→ An entrepreneur forecasts sales of 20,000 units but a competitor launches a cheaper product.
→ Actual sales may be much lower.
Future Conditions Can Change
→ A business plan is based on information available when it is prepared.
→ Customer tastes, technology, competition, government policies and economic conditions can change.
→ The plan may therefore become outdated.
Time-Consuming to Prepare
→ Collecting market information and preparing financial forecasts can take considerable time.
→ This may be difficult for a small entrepreneur who has limited resources.
Can Be Expensive
→ A business may need to pay for market research, consultants or professional financial advice.
→ This increases the cost of preparing the plan.
May Give a False Sense of Security
→ A detailed plan does not guarantee business success.
→ Unexpected events can still cause the business to fail.
Based on Assumptions
→ Financial forecasts depend on assumptions about:
→ sales
→ prices
→ costs
→ customer behaviour
→ competition
→ If these assumptions are unrealistic, the entire plan may be misleading.
May Restrict Flexibility
→ An entrepreneur who follows the original plan too rigidly may fail to respond quickly to changing market conditions.
→ A business plan should therefore be treated as a guide that can be updated, rather than a fixed set of decisions.
Competitors May Gain Information
→ If sensitive business information is shared with potential investors or other parties, there is a possibility that commercially useful information could reach competitors.
Using Business Plans Effectively
→ A business plan is most useful when it is based on realistic market research and financial forecasts.
→ The entrepreneur should regularly compare actual results with the plan.
→ If conditions change, the plan should be updated.
Market research → realistic assumptions → business plan → implementation → compare actual results with forecasts → identify differences → revise plan → improve decisions