Topic 1.3: The purpose and key elements of business plans

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What is a business plan?

Business plan is a written document that describes a business, its objectives and its strategies, the market it is in and its financial forecasts

What is the main purpose of a business plan?

The main purpose of a business plan for a new business is to obtain finance for the start-up

• Potential investors or creditors will not provide finance unless details about the business proposal have been written down clearly

What are the six main elements of a typical business plan?

1. Executive summary − an overview of the new business and its strategies

2. Description of the business opportunity − details of the entrepreneur’s skills and experience; nature of the product; the target market at which the product is aimed

3. Marketing and sales strategy − details of why the entrepreneur thinks customers will buy the product and how the business will sell to them

4. Management team and personnel – details of the entrepreneur’s skills and experience and the people they intend to recruit

5. Operations − premises to be used, production facilities, IT systems

6. Financial forecasts − the future projections of sales, profit and cash flow for at least one year ahead

What are the benefits of a business plan?

A business plan:

1. Forces the owner to think seriously about the proposal, its strengths and any potential weaknesses

2. Gives the owner and managers a clear plan of action to guide their actions and decisions in the early months and years of the business.

3. Provides essential evidence to investors and lenders and it makes the finance application more likely to be successful.

What are three limitations of a business plan?

1. A business plan could create a false sense of certainty in business owners.

   • They might rely so much on the plan that they overlook the fact that it is based on forecasts and predictions.

2. A business plan that is not detailed and supported by evidence will cause prospective creditors and investors to delay in making a finance decision

3. A business plan might lead entrepreneurs to be inflexible.

   • If opportunities arise that are not in the plan, these could be rejected which means that options for future profits and growth are rejected.