What Is a Business Plan?

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Every business owner has a dream, whether big (becoming the next Tesla) or small (being able to quit your day job). Writing a business plan can help you reach those goals. A business plan is a detailed document that describes the steps you'll take to start a new business or expand your existing one. From marketing and hiring to financing and selling, think of a business plan as a road map to making your business dream come true.

How Does a Business Plan Work?

Although all business plans share certain similarities, there are different variations depending on the goals you're trying to achieve.

  • Startup business plan: Write this type of plan before launching a new business. For your company to have a better chance of success, you'll need to think through all the steps involved, figure out how much money you need to open your business, and assess whether your business idea will actually fly. A startup business plan can help.
  • Business plan for financing: Both startup and existing businesses may want (or need) to write a business plan if they're seeking a loan or other financing. In general, traditional sources of financing, such as banks, angel investors and venture capitalists, will require a business plan before they consider financing your business. Non-traditional sources, such as peer-to-peer lenders or online lenders, may not.
  • Business expansion plan: If your business is planning to expand into new geographic or demographic markets, launch a new product or service, or undertake a major expansion, creating a business plan can help you plot your course before you invest your time and money.
  • Business pivot: Sometimes you need to make drastic changes to your business model, such as taking your retail store online-only. When it's time to pivot in a completely different direction, drafting a new business plan can start you off on the right foot.
  • Business acquisition plan: Used when you're considering buying another business, a business acquisition plan digs into the details of that business to assess its viability. It also plans how you'll incorporate the acquisition into your existing business strategy and operations and how the acquisition will benefit you.
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What Is The Purpose of a Business Plan?

When you're eager to start your new business or launch a new product line, you may be tempted to skip the business plan stage altogether. In reality, taking the time to write a business plan delivers several benefits.

  • It helps validate your business idea. The research you'll do to write your business plan will show whether your business is viable or not. By calculating projected sales, revenues, cash flow and net income, you'll know what kind of financial return you can expect and when. If your research shows your idea isn't quite ready for prime time, you can regroup and revise until you find a way to make your concept work.
  • It documents a company's strategic plan and goals. Business plans aren't just for getting loans; they're also useful guides to keep your business on the right track. Referring to your business plan regularly as a road map will help you make sure your business is moving in the right direction on the timeline you set.
  • It helps you calculate the necessary startup capital. Whether you're funding the business yourself or seeking a loan, it's crucial to know how much money you need. Otherwise, you might ask for a loan that's too small, or run out of money before your business breaks even.
  • You may need it to get approved for business loans or investment capital. Lenders and investors want evidence that your business startup or expansion plans are likely to succeed. Your business plan helps convince them your business is worth backing. In particular, the financial section of the plan helps demonstrate that you'll make enough money to repay the loan or generate a good return for investors.

A business plan is different from an investment proposal. An investment proposal is a presentation or document you show potential investors to persuade them to invest in your business. It includes some of the same information the business plan contains, but it's designed to convince investors your business is a lucrative opportunity, so it emphasizes your competitive advantages, the size and potential of the market and expected return on investment (ROI). Think of the investment proposal as the "sizzle" to get the investors excited, and the business plan as the meaty steak.

Who Needs a Business Plan?

Both startups and existing businesses can benefit from writing a business plan.

Startup Businesses

Just as you wouldn't take off on a cross-country road trip without a GPS, you shouldn't set out to start a business without a well-thought-out plan. Writing a business plan means answering some tough questions, such as who will buy what you sell, why they'll want to buy it, and what makes your product or service superior to the competition's. Then there are the nuts-and-bolts questions such as who you'll need to hire, how your business will operate and, of course, how you'll pay for it all.

Even if you don't plan to seek startup financing, writing a business plan can reveal potential problems you may not have considered, or opportunities you may have overlooked. For example, as you work through your business plan, you might realize you need $150,000—not $50,000—to launch the business you have in mind. Better to find that out now, when you still have time to revise your plan (or raise more money).

Starting a business can be overwhelming, but with a startup business plan in hand, you'll have a detailed guide to refer to when you're not sure of your next step. Following the business plan will help ensure nothing falls through the cracks.

Established Businesses

Established businesses may need financing to buy another business, expand to new markets or add new products and services. Writing a business plan can help you pinpoint exactly how much money you need for your project and determine the best way to achieve your goals.

Even if you're not looking for financing, writing a business plan before any big pivot can help keep your established business on the path to success. An established business might also need a business plan to persuade a potential partner or key executive to come on board, or to persuade a strategic partner to join forces.

What Is Included in a Business Plan?

A business plan typically includes the following sections.

  1. Executive summary: Designed to get attention from a lender or investor, this brief introductory section concisely sums up key points from the rest of the business plan. Explaining what your business does and what makes it different from the competition, it should pique the reader's attention and make them want to learn more.
  2. Company description: This section explains what your company does and includes your company's mission statement, vision and goals. It also explains the legal structure of your business (corporation, sole proprietorship or other structure), the history of the business, and who your competition is.
  3. Product or service description: Here, you explain what you'll be selling, including pricing, the problems it solves for your target market and why it's superior to the competition.
  4. Market analysis/marketing plan: This section reviews the potential market for your product or service based on market research into your target customers and your competitors. You'll also explain your product or service in more detail, as well as your plans for marketing, distributing and selling it.
  5. Operations plan: How will you set up and run your business? Explain your plans for choosing a location, the kinds of employees you'll need and what equipment you'll require. This section should give readers a clear idea of how your business will operate day-to-day.
  6. Management plan: Essentially, this section fleshes out your organizational chart. Which key roles do you need to fill and what will each position be responsible for? If you already have key people in place, share details on their background and experience to show why they'll help your business succeed.
  7. Financial plan: Depending on your stage in business, this may include a section for startup costs that details how much money you need and how it will be spent. You'll also include financial projections for sales, cash flow and profits and losses, and estimate when your business will start to break even. If you're seeking financing, specify how much money you need and exactly what you'll use it for, and include sales and financial projections showing how the money will help your business grow.

The U.S. Small Business Administration (SBA) provides detailed guidance on writing a business plan, including sample business plans and a link to business counselors who can help you with the process.

Using a Business Plan to Get a Loan

Will you be using your business plan to apply for a loan? In addition to polishing your business plan, take some time to buff up your credit scores. Lenders may consider your personal credit score when evaluating your loan application, particularly if you're a startup. How well you manage money in your personal life is generally a good indicator of how you'll manage a business loan.

You can check your personal credit report and credit score for free. If your score needs some improvement, bring your accounts current, pay down debt and take other steps to increase your credit score before you apply for a business loan. If your business is established, it most likely has a business credit score; check that, too, and take steps to boost that score if necessary.

Just starting out in business? It's never too soon to begin establishing business credit by incorporating or forming an LLC, getting a federal Employer Identification Number (EIN), and opening bank accounts in the name of your business. Building a good business credit score can help you get credit in the future—and finance even bigger business dreams.