Business Plan

Encyclopedia of Management. Ed. Sonya D. Hill. 7th ed. Detroit: Gale, 2012.
Full Text: COPYRIGHT 2012 Gale, Cengage Learning
Full Text:

A business plan is a written document used to describe a proposed venture or idea. It typically
includes the current state of a business, future vision for the business, target market analysis and
challenges, sales and marketing strategies, and funding requirements to reach stated goals. Many
business plans are designed with the intention of securing funding and investors to support a proposed
idea; others are designed to assist with reorganization, takeovers, or to serve as an internal planning
document.

A business plan can also offer clear, immediate advantages to struggling companies, or to those
intending to sell their business concepts. Mike McKeever gives several of these advantages in his
2007 book, How to Write a Business Plan:

1. A business plan will help the business find financial backers. Since investors require a business
plan before giving a company any significant backing, it is a good idea to plan and write one
before looking for aid. After creating a plan, leaders of the business will understand more
clearly where their money goes and what it is spent on—information the investors will want to
know.
2. A business plan will help a starting company decide whether to proceed or stop. Creating a plan
for a new business allows leaders to examine potential strengths and weaknesses of the
business, giving them the confidence to move forward or possibly the knowledge to reassess the
functionality of their ideas.
3. A business plan allows leaders to improve the business concept. In making the plan, leaders
may realize parts of the organization they need to change or reevaluate. Writing the plan gives a
chance to change the goals of the business for the better.
4. A business plan helps keep the business on track. With the straightforward rules, goals, and
parameters of the plan written down, a business has more focus. In this way, the business plan
can also act as an action plan for a company, describing goals and the steps needed to
accomplish them.

According to Per Davidsson and Benson Honig, authors of a 2010 conference paper about the subject,
business plans are also useful because they act as a way to legitimize a business, especially when it is
new or very small. Davidsson and Honig describe the business plan as a “calling card,” which
provides an important first impression of a business.

Elements of a Business Plan

The U.S. Small Business Administration recommends that a business plan describe four main
elements of the proposed venture: an overview of the business, a marketing analysis, a financial plan,
and a management plan. An executive summary and other supporting documents should also
accompany the plan. These elements provide a solid starting point for a general plan, but there is no
single formula to a business plan and a multitude of factors will impact the amount of content needed
in a good business plan.
The executive summary is a synopsis of the entire business plan. It is critical that this summary be
carefully crafted and compelling. This is the first and possibly the only information that a potential
investor will read; if it is not informative enough or if it lacks crucial data, the investor might not read
beyond this summary component.

The business overview segment is a profile of the company and its primary industry. Projections,
trends, and industry outlooks should be included. In this section the company describes the unique
elements that make it a prime candidate for its proposed venture.

A market analysis details how the company will handle its sales and marketing strategies. This
analysis includes information on the company’s products or services and intended customers, and how
customers will be made aware of the product or service. This section should also include a
competitive analysis with a breakdown identifying Strengths, Weaknesses, Opportunities, and Threats
(SWOT) in connection with the company and the business proposed. A plan of action should explain
how the company will address, exploit, or withstand each of these eventualities.

The financial section discusses the current financial state of the company and what types of financing
will be required for the proposed venture. It is appropriate to discuss the specific dollar amounts
required for the business venture, the cost to maintain and sustain the venture, and projections of
income, balance sheets, and cash flow. Statistics, facts, and research should support any financial
projections listed. Many experts recommend the SMART model of financial analysis. According to
the SMART system, the business should be able to list and explain how its goals are Specific,
Measurable, Achievable, Realistic, and Timed. Specific goals should be natural to a strong business
plan. Measurable goals should include current and expected data, along with systems of analysis to
track changes. Achievable and realistic goals can be met within the framework of the business’s assets
and skills, and timed goals are set forth at the proper moment in the organization’s evolution.

The management plan section should discuss the strengths, experience, achievements, and expertise
of the person or team undertaking the business venture. Investors want to know that they are offering
their support to a person or team qualified and capable of handling the business proposed and the
funds loaned.

A complete business plan will provide evidence to the lender that the entrepreneur has performed a
thorough investigation of this new business venture, because it details how the business will generate
cash flow, pay for operating expenses, and service debt repayment.

The accompanying table offers several elements for inclusion in designing a business plan.
In addition to these structures, Edward Rogoff, in his 2007 book Bankable Business Plans, gives six
main strengths every business plan should convey. These strengths Rogoff calls the six immutable
points, the goal being to prove these points to any reader of the business plan.

1. You are profit-oriented.

2. You are honest.
3. You are qualified.
4. You are thorough.
5. You are committed to meeting everyone’s needs.
6. You are flexible.

David Dixon, in a 2010 article appearing in the Evening Gazette newspaper, noted that the appearance
of the business plan is important. If someone is using the business plan to get financing, the
presentation of the plan can influence lenders and other professionals before they even read a word.
Dixon noted that the plan should be clearly subheaded, with a title of contents and page numbers for
easy browsing, and should include a professional cover. He further suggested that the business plan be
legible and formatted so that it can easily be sent through e-mail as needed.

Customizing for Investor Type

Bankers, venture capital fund managers, and business angels (wealthy individuals who exchange
company equity for start-up cash) each look at different features of a business plan when assessing it
for investment. Bankers tend to focus on the financial aspects of the plan and give little attention to
marketing and management issues. Venture capital fund managers are typically most interested in
both the marketing and the financial aspects of the plan. Business angels focus on entrepreneurial
elements and “investor fit” considerations. Thus business plan writers should customize their
proposals based on the audience they are trying to reach.

Bankers are interested in businesses that will be successful over the long term and entrepreneurs who
will remain committed to the project as described in the business plan. When making their lending
decisions, they are interested in collateral as security for the loan, and they tend to support projects
that are less risky. A banker’s main interest is the repayment of the loan.

Venture capital fund managers invest for capital gain, and when a venture is successful, they also
benefit. Likewise, if a business fails, venture capital fund managers stand to lose significantly and at
much cost to the outside investors whose funds they are managing. Therefore, venture capital fund
managers focus on the uniqueness of the product or service, the status of the market, and the
management team’s potential for success. Their main interest is growth potential and potential
returns.

The interests of business angels align more closely with those of venture capital fund managers than
bankers. Business angels focus on how their interests match up with the entrepreneur’s and how well
they are able to work with the entrepreneur over the length of the project. They seek out entrepreneurs
who have strong, positive qualities, such as integrity and responsibility, and with whom they feel a
connection. Because the investment is personal for the business angel, he or she is interested not only
in financial gains but also in the enjoyment that comes with the opportunity to participate in the
venture. A business angel’s main interest is potential returns, camaraderie with the entrepreneur, and
personal involvement.

Fred S. Steingold, in his 2007 Complete Guide to Selling a Business, writes that a good business plan
will aid investors in several other, more intangible ways. The strength of a strong vision for business
direction can inspire interested buyers, communicating the power of the idea as well as the financial
prospects. Investors who believe in the organization’s goals will be much more likely to understand
business models and provide financial support for endeavors. Also, Steingold believes a strong
business plan gives buyers a cushion, something to rely on when they get cold feet. Negotiations can
go on for weeks, and when time lends uncertainty to the buyer’s decision, the buyer can rely on the
business plan as proof the sellers know what they are doing.

Overcoming Challenges
As Davidsson and Honig noted in their 2010 conference presentation, business plans have received
criticism for being labor-intensive and time-consuming while providing little flexibility. By their very
nature, business plans require businesses to list specific details about a business. However, many
businesses change rapidly, leaving some to question whether the business planning model is flexible
enough for a dynamic business model. On the other hand, Davidsson and Honig also note that the
business plan can provide a type of structure and certainty which can be useful in an uncertain and
changing environment.

Another major challenge managers and entrepreneurs face when writing a business plan is the amount
of research involved. While a company may have access to internal documentation about itself, a
good business plan usually involves competitive analysis, a look at the industry as a whole, market
research, and other forms of outside research. There are companies that will compile this research on
behalf of businesses. There are also government agencies as well as private companies offering
research reports that can be useful during the writing process.
Recent Trends
One trend in recent years is the competitions which have been developed to help entrepreneurs secure
capital based on the strength of their business plans. Competitions such as the Spring-BOARD
challenge, Progress2Capital business planning competition, the Wisconsin Governor’s Business Plan
Contest, and the University of Dayton Business Plan Competition provide entrepreneurs with tens of
thousands of dollars in funding. All business owners need to do is craft a winning business plan and
business pitch. Some of these competitions provide mentorship and resources to help businesses
create business plans. All allow for a direct route from business plan to financing, without the need
for business loans or lenders. As an added bonus, the winners of these business plan competitions
often go on to receive a great deal of free publicity, simply by winning or placing in such a
competition. For example, the five finalists for the 2010 University of Dayton Business Plan
Competition—Infant Innovations, MyInsuranceComparison.com, MissApp, Idea Rally, and DECX
Modular Decking System—all received free media attention and publicity as well as a chance to pitch
their products to the public. Most business plan competitions are open to new and start-up companies.

Living Documents
Some businesses choose to replace the traditional business plan with what is called a “living
document,” typically one page in length and with a forward-looking range of one year. Goal-setting
may be projected on three- to six-month time frames, which are more easily monitored and attainable.
The living document contains similar elements of a typical business plan—vision, values, objectives,
methods toward reaching objectives—but abbreviated to fit on a single page. This document needs
constant updating and adjusting, with ample flexibility to respond to customer and market
fluctuations. However, it is a very useful form of business plan for businesses experiencing rapid
growth or change. Highly-tailored documents may also need to be prepared for each type of
stakeholder, whether bankers, venture capital fund managers, or business angels.

Feasibility Plan
While many traditional business plans are designed to help a business present the best possible face to
lenders and those outside the business, the feasibility plan is intended more for company managers
and owners. The feasibility plan considers a potential business venture and examines whether the
venture is likely to make a profit. A business feasibility plan will usually include a detailed
description of a product or service, a cost analysis, market research, a description of potential risks,
competitive analysis, break-even analysis, profitability projections, forecasts, details of investment
required, budgeting, a conclusion, and recommendations. The feasibility plan essentially allows a
business to test, on paper, whether a business idea or venture is likely to work, thereby assisting with
decision making. If a business does decide to engage in the venture, the feasibility plan can help
provide an action plan or a plan of attack, and it generally describes the steps the company will need
to take to make a new venture profitable.

Not every business decides to create a feasibility plan for every new service, product, or venture.
However, this type of business plan is especially useful in cases where a company’s success is
determined by the introduction of a new product or service and in cases where a company stands to
lose or gain a great deal from a venture. Feasibility plans, since they are internal, can be shorter and
less formal than business plans submitted to investors and lenders. However, since they are a
decision-making tool, feasibility business plans must still be carefully researched and considered.
Managers must be careful to do all the research regarding target markets, break-even points, and
likely profitability. Failure to do so can mean that the company becomes entangled in a business
venture with little chance of success.

To create a feasibility plan, a manager needs to begin by asking a question, such as, will this new
venture likely be profitable? or, should we take part in this new venture? Unlike a business plan, the
feasibility plan is designed almost exclusively to help the entrepreneur and manager make an initial
decision about a venture. It is important not to have a prejudgment about the profitability or lack
thereof of the venture; the role of the feasibility plan is to determine, through careful research,
whether a plan is feasible. It is only after all the information has been gathered and carefully analyzed
that a decision can be or should be reached. As with a business plan, the feasibility plan will require a
careful examination of the company as well as outside research.

A feasibility plans looks much like a business plan, with sections for venture details, budgeting and a
cost analysis, market research, competitive analysis, break-even analysis, profitability considerations,
forecasts, an action plan, risks, resources, possible competitive advantages, and a conclusion. Unlike a
business plan, the feasibility plan usually ends with recommendations—whether to tackle the new
business venture or not. Once a draft of the plan is compiled, it is often a good idea to get other
decision makers in the company involved. They can provide feedback, suggestions, and
counterarguments which can help managers determine the right decision to make. Once a decision has
been made, the feasibility plan can be used as the basis of an action plan to make the venture work. A
condensed form of the feasibility plan can also be included in a traditional business plan. This is a
good option especially with a start-up company that has few current products, services, and business
ventures to describe. The company can use the feasibility studies to show that future business
ventures, products, and services have been carefully considered and researched to ensure their
success.

Resources
There are many resources for the entrepreneur looking to write a business plan. Local business
organizations, public libraries, colleges, and universities may offer useful workshops, seminars, or
courses. There are also private businesses which offer to write and research business reports on behalf
of busy entrepreneurs. Such services range in cost from a few hundred to a few thousand dollars.

Local SBA offices or the SBA Web site (sba.gov) also offer resources.The SBA provides free online
courses, e-mail guidance, print materials, and face-to-face consultations to small-business owners.
The SBA also administers the Small Business Development Center Program to provide management
assistance to current and prospective small-business owners. This program provides a broad-based
system of assistance for the small-business community by linking the resources of federal, state, and
local governments with the resources of the educational community and the private sector.

One excellent way to learn is to read sample business plans, which are often published and distributed
by large companies. According to a 2010 article by Stephen Fadel, published in the Online journal,
reading business plans is simple; samples are available online, and there are contests which publish
winning business plans. Reading the business plans of competitors or large companies within the
same industry helps the new manager or entrepreneur learn how such plans are usually compiled.
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Source Citation (MLA 8th Edition)

"Business Plan." Encyclopedia of Management, edited by Sonya D. Hill, 7th ed., Gale, 2012. Small
Business Resource Center, http://link.galegroup.com/apps/doc/KKKMDB228929241/SBRC?
u=sberc&sid=SBRC&xid=d8389d51. Accessed 24 Sept. 2018.

Gale Document Number: GALE|KKKMDB228929241