Components & significance of a business plan
Most of the time, entrepreneurs have difficulty understanding what a business plan is and what’s the real need for it.
Well, many times, startups and entrepreneurs think that the need for a business plan is just to secure funding for the business. Though this is certainly one of the reasons, it’s not the only one and indeed not the most important one.
Whether you’re planning to open a business as small as selling flowers through a retail (or online) route or planning for a disruptive tech business, you need to be clear about the goals that you wish to achieve and the strategies and roadmap to achieve those goals. That’s where your business plan comes in.
“It is a tool that makes the communication with your investors, potential partners and even customers quite easy”
What Is a Business Plan? – The Definition
A business plan is a written document that describes your business, the offerings (products/ services) in your business, the ways to earn money, the operating model of the business, the financial aspects including the capital requirements to fund the business, organizational structure, goals, and strategies and the potential problems that may arise in the business including the ways to solve them.
Why is Business Plan Important?
Whether you are a traditional business or a startup, a business plan helps you to effectively communicate your business and related aspects like the offerings, different strategies, competitive analysis, long-term and short-term goals, etc. with the stakeholders in your business such as customers, partners, investors, etc.
It directs the business and guides it through a path to help progress with confidence and solve the problems confronted in a planned manner.
Following are the reasons why a business plan is important for any business including a startup:
- To create a roadmap
Establishing goals and more importantly creating a clear roadmap to achieve those goals is the primary purpose of writing a business plan. It helps to define a path that businesses should follow to attain the planned objectives. These objectives include the milestones with detailed steps on how to achieve those milestones.
- To attract the right talent
A business plan helps you to attract the right employees for your business. A clear description of your goals along with the ways to achieve such goals helps not just you to hire people who are a good fit for your company but also makes easy for the job seekers to know whether the job is a right fit for them as far as their skills are concerned.
- To secure funds
Investment either in the form of bank loans or from private investors is possible only by communicating your business plan with them. Investors are interested in getting the answers to questions such as:
- How will the money be made?
- What are the projections of revenue and expense in the future?
- What are the plans to achieve the milestones?
- How long will it take to reach the breakeven?
- How will the investors receive the return on their investment?
- To evaluate Ideas
If you have multiple ideas in mind, you may create a separate business plan for each of them. This will help you to focus only on those ideas that have the highest chance of success.
- To collaborate with partners
A clear overview of your vision, your strategy for growth, our goals, and your target audience make it easier for potential partners to identify their fit with your business. This helps them to confidently decide whether to make any collaboration with you or not.
Structure of a Business Plan
Though there are many components of a business plan which we shall discuss later in this article, the entire plan is built over around three main sections as follows:
This section discusses the offering of your business i.e. your product or service, the type of industry that your business falls in, your business goals, and the ways to achieve them.
In this section, you describe your potential customers, their demography, the market size, and also your competitors and your unique competitive advantage to differentiate yourself.
Here you describe your cash flow & income statement, your break-even analysis including your fixed and variable cost description and other financial aspects like balance sheets, etc.
Elements of a Business Plan
A business plan should be clear and understandable. It should contain the necessary information that can be easily communicated to the stakeholders.
Following are the key elements of any business plan:
It gives a brief overview of the entire business in such a way that holds the interest of the investors in reading the business plan further. It should cover all the key points like the business idea, vision and goals of the business, the team, the offering and its differentiation in the market, competitive analysis and competitive advantage, target market, marketing plan, financial projections & funding requirements.
It explains what the company is all about; its vision & mission, plans, principles, philosophy, goals, the structure of the business including the legal structure, business objectives, and the industry type. It answers the important question like why your business exists; the problem that you’re trying to solve and how your solution is different from the competition.
It includes the estimation of the market size for your offering, market trends, customers’ expectations, and needs. It provides a strong reason for the chosen market and gives evidence (based upon customer profile, industry trends, etc.) in the form of facts & data, to justify the market size.
Customer segmentation is an important element of the business plan. This section tells about the persona of the target customers including their demography, geography, psychographics, their behavior, etc. It also tells about the things they value including their functional, social, or emotional needs, desires, expectations, etc.
Offering (Products & Services)
This section discloses what you offer or plan to offer to your target customers. It explains all the details of your offering including the value that it delivers or would deliver to you target customers, its unique features, and any other key details about the product or service.
This section describes your direct and indirect competitors and presents a clear comparison of your business with that of your competitors in terms of the value delivered to customers, USP (Unique Selling Proposition) with the main unique features, and your competitive advantage over them taking the business as a whole.
Your target customers reveal the way by which they like to be reached during persona mapping. Your marketing efforts should, therefore, be based on the information you receive from your prospective customers.
Marketing plan thus focuses on the way by which the company plans to reach out to its customers using the above information.
It contains information on four P’s namely product, price, promotion and place.
Product is what you sell and how you differentiate it in the market.
Price includes the product cost and the reason for arriving at that cost.
Promotion is finding and executing ways to reach the potential customers.
Place is the location where you would sell your product.
Business Model is the way of defining the processes of a business and explains the working of the business as a whole. It explains how the offering is a fit for the target market, what channels will be used to deliver the offerings to the customers & what kind of resources, activities, and partners are required to enable the business to operate.
The ways by which business earns money is explained in the revenue model section of the business model. The costs that are incurred for executing the business are explained in the cost structure section of the business model.
Business Model Canvas is a great tool to understand all aspects of your business model and interdependencies of various components in a comprehensive manner.
The business with an extraordinary idea may fall flat without a capable team. This is the reason why investors always want to know about the team members before investing in any startup or a business. This section provides information related to experience, qualification about the founders of the business, key employees, board members, advisors, etc.
Financial feasibility is at the core of any business. This section is therefore the most important section among all as it tells whether a business is financially feasible by stating the cost of execution of business, the revenues generated and the profit or loss made. Typically, there are three main sections of the financial plan: an income statement, a balance sheet, and a cash-flow statement.
The income statement tells about the revenue sources and expenses incurred over a given period of time. With this information, the profit and loss of a business can be deduced.
The balance sheet lists all the assets that you own in your business and the liabilities that you owe. The difference between the two gives the equity you own as a shareholder in your business.
Cash-Flow Statement answers when the revenues are collected and when the expenses are paid. When the cash that flows into your business is greater than the cash that flows out, you have a positive cash flow and negative if the opposite is true.
A Business plan helps you look forward in time and identify the next steps to be taken in business. It helps find the gaps and thus prevents such gaps from becoming problems later. It, therefore facilities smooth take-off & running for your business.
Do you feel there is something more to be included? Kindly write to us. We will be more than happy to consider your valuable suggestions.