Business plan

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.

1 Is a business plan necessary?
2 Components of a business plan
3 Sources
4 External resources

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Is a business plan necessary?

If those starting a new company anticipate seeking start up capital from funding sources like venture capitalists or angel investors, the founders should expect to provide potential investors with a detailed business and financial plan. However, if the new business is being started in response to a specific opportunity or situation, or is a side venture, there is an on-going debate on whether or not a detailed and formal business plan is necessary. On January 9, 2007, an article in the Wall Street Journal (source, subscription required) examined this debate between those who disagree on whether or not a business plan is important to the eventual success of a start up company. The article cited a study by Babson College that 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 start-up 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 definitive academic analysis of entrepreneurial success, The Origin and Evolution of New Businesses (Amazon link), 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.

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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:

1. Cover sheet
2. Statement of purpose
3. Table of contents

I. The Business

A. Description of business
B. Marketing
C. Competition
D. Operating procedures
E. Personnel
F. Business insurance

II. Financial Data

A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro forma income projections (profit & loss statements)
a. Three-year summary
b. Detail by month, first year
c. Detail by quarters, second and third years
d. Assumptions upon which projections were based
F. 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.

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