A Business Plan precisely defines a business, identifies its goals, and serves a means to describe the company's mission and road map to success to various audiences, especially potential financial backers.
Is a business plan necessary?
There is a debate between those who believe writing a business plan is essential to the success of a startup and those who don't. The debate is based on a wide range of evidence and research -- and on conventional wisdom and practices, common sense and certain requirements in the unique situations of different types of businesses in different industries.
Here is a synopsis of the debate about the need for a business plan before starting a business (Note: There is little debate over the need for business planning in running a business. This specifically refers to the formal business plan developed before a business is launched.):
You need a business plan
- If a new startup company will need capital from funding sources like venture capitalists or angel investors, or through loans financed with backing of the SBA, the founders will need to provide potential investors and other financial sources with a detailed business and financial plan.
- A business plan provides a reality check for the founder's unbridled enthusiasm for an idea. The discipline necessary to thoroughly research the opportunity and threats often uncovers a major hurdle to success. Going through the exercise of exploring the potential revenues and costs associated with an idea will inform the founder whether or not a good idea is actually a business idea.
- As you would not start any journey without a map, you should not start out on a journey to build a business without some clearly defined goal.
You do not need a business plan
- If the new business is being started in response to a specific opportunity or situation, or is a side venture that has grown into a full-time venture, a detailed and formal business plan may not be necessary. According to the The Wall Street Journal, a study by Babson College found no statistical difference in success between those businesses started with formal written plans and those without them. According to the study's findings, "unless you need to raise external startup capital from institutional sources or business angels, you do not need to write a formal business plan."
- Amar Bhidé, a Columbia University entrepreneurship professor, and author of the academic analysis of entrepreneurial success, The Origin and Evolution of New Businesses , found that 41% of Inc. magazine's 1989 list of the 500 fastest-growing private firms didn't have business plans and 26% had only rudimentary plans. A follow-up by the magazine in 2002 found the numbers without a plan have remained pretty much the same.
Components of a business plan
The basic components include a current and pro forma balance sheet, an income statement, and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.
Although there is no single formula for developing a business plan, some elements are common to all business plans. They are summarized in the following outline:
- Cover sheet
- Statement of purpose
- Table of contents
I. The Business
- Description of business
- Challenges and how you will address them
- Operating procedures
- Business insurance
II. Financial Data
- Loan applications
- Capital equipment and supply list
- Balance sheet
- Breakeven analysis
- Pro forma income projections (profit & loss statements)
- Three-year summary
- Detail by month, first year
- Detail by quarters, second and third years
- Assumptions upon which projections were based
- Pro-forma cash flow
III. Supporting Documents
- Tax returns of principals for last three years personal financial statement (all banks *have these forms)
- For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor
- Copy of proposed lease or purchase agreement for building space
- Copy of licenses and other legal documents
- Copy of resumes of all principals
- Copies of letters of intent from suppliers, etc.
- "Do Start-Ups Really Need Formal Business Plans? " WSJ.com, January 9, 2007
- The Origin and Evolution of New Businesses
- Category:Business planning
- Category:Starting a business
- Directory of Business Planning Software websites
- Business Plan Archive | University of Maryland - Online repository for business plans and related planning documents
- | How to Write a Business Plan, SBA.gov
- Business Plan for Home Based Businesses - Provides a comprehensive approach to developing a business plan for a home based business.
- Free Business Planning Courses - Free at-your-own-pace courses on developing and writing successful business plans.