What is a business plan?
A business plan is a written roadmap that explains what a company intends to accomplish, who its customers are, how it will make money, and the resources and timeline needed to get there. For startups, it is often a fund-raising tool; for established firms, it is a way to align leadership and guide growth decisions.
Key benefits (short)
– Clarifies goals and strategy.
– Tests assumptions before major investments.
– Helps win loans or outside capital.
– Provides a basis for performance tracking and course correction.
– Forces identification of risks and contingency options.
Core components (what investors and managers typically expect)
– Executive summary: a concise snapshot of the business, opportunity, and the ask (funding, partners).
– Company description: mission, legal structure, history, and ownership.
– Market analysis: target customers, market size, trends, and competitor landscape.
– Products/services: descriptions, pricing, and key differentiators.
– Marketing and sales: distribution channels, customer acquisition and retention plans.
– Operations: facilities, technology, suppliers, and day-to-day processes.
– Organization and management: team, roles, and governance.
– Financial plan: revenue model, projected profit & loss, cash flow, balance sheet, and funding needs (investors often want 3–5 year forecasts).
– Risk and exit strategy: principal risks and how investors can realize returns (e.g., sale, IPO).
– Appendix: contracts, patents, résumés, and other supporting documents.
Traditional vs. lean plans
– Traditional (full) plan: detailed, often 15–25 pages plus appendices; used when seeking bank loans or venture capital.
– Lean startup plan: a short, one-page or few-page document that states the value proposition, key activities, resources, partners, customer segments, and revenue streams; useful when many assumptions remain to be tested.
Why business plans fail
Common causes of failure include unrealistic assumptions, poor market fit, insufficient testing of customer demand, unexpected competitive or economic shifts, and plans that are too rigid to allow necessary pivots.
How often to update
– Established, stable businesses: at least annually or when strategic shifts occur.
– Early-stage or fast-growing companies in competitive markets: quarterly or after major milestones/market feedback.
Treat the plan as a living document.
Checklist: step-by-step to build a usable plan
1. Define the purpose: fundraising, internal strategy, or partner briefing.
2. Gather facts: market research, customer interviews, competitor analysis, team CVs.
3. Draft the executive summary last.
4. Write market analysis and value proposition next.
5. Specify operations, organization, and go-to-market plan.
6. Build financial projections (revenue, costs, cash flow) and state key assumptions.
7. Prepare risk assessment and exit strategy.
8. Add supporting documents to the appendix.
9. Edit for clarity; avoid generic templates—reflect what makes your business distinct.
10. Share for external feedback (mentor, accountant, SCORE counselor) and revise.
Suggested length: assemble main content into roughly 15–25 pages; place detailed legal/patent documents in appendices.
Basic financial formulas to include
– Revenue = price × quantity sold.
– Gross profit = revenue − cost of goods sold (variable costs).
– Contribution margin per unit = price − variable cost per unit.
– Break-even units = fixed costs ÷ contribution margin per unit.
– Cash flow = beginning cash + cash receipts − cash disbursements.
Worked numeric example (break-even and first-year projection)
Assumptions:
– Product: monthly subscription priced at $20.
– Variable cost per subscriber: $2/month.
– Fixed monthly operating costs: $10,000.
– Starting subscribers month 1: 300; net additions +100 subscribers each month.
1) Break-even customers (monthly)
Contribution margin per subscriber = $20 − $2 = $18.
Monthly break-even customers = $10,000 ÷ $18 ≈ 556 customers.
So at 556 paying subscribers the business covers fixed costs (ignoring taxes and capital costs).
2) Simple first-year revenue and gross profit (annualized)
If subscriber count grows by 100 per month starting at 300:
Month 1 customers = 300; Month 12 customers = 300 + 11×100 = 1,400.
Approximate average monthly subscribers over year = (300 + 1,400) ÷ 2 = 850.
Annual revenue = average monthly subscribers × price × 12 = 850 × $20 × 12 = $204,000.
Annual variable costs = average monthly subscribers × variable cost × 12 = 850 × $2 × 12 = $20,400.
Annual gross profit = $204,000 − $20,400 = $183,600.
Annual fixed costs = $10,000 × 12 = $120,000.
Operating profit = $183,600 − $120,000 = $63,600 (before interest, taxes, depreciation).
This simple model highlights how customer growth, price, and costs drive viability; you should build month-by-month cash flow to capture timing.
Practical tips
– Lead with a crisp executive summary when targeting investors; they read it first.
– Provide realistic, evidence-based assumptions—investors prize credibility.
– Build sensitivity cases (best, base, worst) to
…test how changes in price, volume, or costs affect cash flow and valuation. Run numeric scenarios (e.g., ±20% subscribers, ±10% price) and show how long the business can operate under each case.
– Include a monthly cash-flow model for at least 12–24 months; investors care about timing (when revenues hit, when expenses spike).
– State the funding need clearly: how much you want, the form (debt, equity, convertible), and exactly how the money will be spent (hire, marketing, product, working capital).
– Define key milestones and metrics (KPIs): customer acquisition cost (CAC), lifetime value (LTV), churn, monthly recurring revenue (MRR), break-even month, and runway in months.
– Summarize key risks and mitigations (market, execution, regulatory, supply-chain), with contingency plans and trigger points.
Worked sensitivity example (continue numeric model):
– Base case (from earlier): 850 avg monthly subscribers → annual operating profit = $63,600.
– Best case (+20% subscribers): 850 × 1.20 = 1,020 subscribers.
– Annual revenue = 1,020 × $20 × 12 = $244,800.
– Annual variable cost = 1,020 × $2 × 12 = $24,480.
– Annual operating profit = $244,800 − $24,480 − $120,000 = $100,320.
– Worst case (−20% subscribers): 850 × 0.80 = 680 subscribers.
– Annual revenue = 680 × $20 × 12 = $163,200.
– Annual variable cost = 680 × $2 × 12 = $16,320.
– Annual operating profit = $163,200 − $16,320 − $120,000 = $26,880.
Break-even math (simple):
– Contribution per subscriber per month = Price − Variable cost = $20 − $2 = $18.
– Monthly fixed costs = $10,000.
– Monthly break-even subscribers = Fixed monthly / Contribution per sub = 10,000 / 18 ≈ 556 subscribers.
– (Check: 556 × $18 ≈ $10,008 ≈ covers fixed costs.)
Cash-runway and burn:
– Monthly operating profit (or loss) = Monthly gross margin − Monthly fixed costs.
– If monthly cash burn is positive (loss), Runway (months) = Cash balance / Monthly cash burn.
– If profitable, runway extends; still project seasonality and one-time cash needs.
Practical checklist to finalize a plan
1. Executive summary: one page with the ask and why it matters.
2. Problem & solution: concise value proposition and differentiators.
3. Market analysis: TAM (total addressable market), SAM (serviceable available market), customer personas, and competitors.
4. Business model & pricing: unit economics, revenue streams, and channels.
5. Go-to-market plan: acquisition channels, sales cycle, and timing.
6. Operations & team: roles, hiring plan, and key contracts.
7. Financials: monthly cash flow (12–24 months), quarterly P&L, balance sheet, and 3–5 year projections; include assumptions.
8. Funding request & use of funds: tranche plan and milestones tied to spending.
9. Risks & mitigations.
10. Appendix: resumes, customer validation, sample contracts, and market research sources.
Tips for credibility
– Show sources for inputs (surveys, third‑party reports, pilot results). Document your assumptions in a separate assumptions tab.
– Use conservative assumptions for adoption and pricing; show upside as a separate case.
– Validate early with customers (letters of intent, paid pilots) and include these as evidence.
– Reconcile top‑down market sizing (industry reports) with bottom‑up (price × addressable customers) and explain gaps.
How investors read financials
– They look for a clear path to unit economics that scale: CAC < LTV and improving margins over time.
– They care about cash runway and key inflection points (when you break even, when a new product pays back CAC).
– Simpler models with transparent assumptions are preferable to complex spreadsheets hidden behind vague inputs.
Further reading and templates
– Investopedia — Business Plan: https://www.investopedia.com/terms/b/business-plan.asp
– U.S. Small Business Administration (SBA) — Write your business plan: https://www.sba.gov/business-guide/plan-your-business/write-your-business-plan
– SCORE — Business Plan Templates and Examples: https://www.score.org/resource/business-plan-template-startup-business
Educational disclaimer
This information is educational and illustrative only; it is not individualized investment advice or a recommendation to invest. Verify inputs, consult professionals for tax, legal, or financial planning, and consider your own risk tolerance before acting.