What Are the Components of a Business Plan?

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When you have a business idea, creating a business plan can provide you with a road map that helps you determine your strengths and weaknesses in the marketplace, develop effective business strategies and estimate your financial success and growth. Along with helping you show that a new business idea is viable, a business plan is a living document that you'll update regularly and present for various purposes.

TL;DR (Too Long; Didn't Read)

Common elements of a business plan include the executive summary, company description, management and personnel summary, marketing strategies and funding request. The other elements include the product or service description, financial projections, sales strategies, market analysis, competitive analysis and appendix.

Importance of a Business Plan

Before you start the work of writing all the contents of a business plan, it helps to understand how the document can improve the chance that your business succeeds.

This document gives you an opportunity to carefully analyze every detail of your proposed business so that you can spot potential issues and make corrections before you begin to operate. It helps you verify that your business idea has a real potential for profitability and wouldn't turn off potential investors and lenders due to risk. A business plan can also help you with making important decisions regarding marketing, product selection and sales strategies and with setting some initial benchmarks for performance.

The Executive Summary

When writing your business plan, the first section is usually an executive summary that provides a preview of your business idea to readers. Often, this section is a page or less, and the contents can vary depending on your business type and current stage of formation.

An executive summary for a new business needing some financing would include some basic facts that investors and lenders would want to know. For example, you'd show evidence that your business idea is viable, describe your target market and key strategies and provide a financial analysis with projections for the first few years.

In contrast, this business plan section for an established business could include items such as your company mission statement, current financial status and key accomplishments. You could also address any future business goals, like expanding into new territories or adding to your product line.

Description of Your Company

After providing a summary of the plan, you'll continue with a more detailed discussion of your company, its goals and its intended operations. This section usually mentions the business setup, such as whether you'll run a partnership, corporation or something else. It also gives your mission statement, company history and key business objectives, possibly with related financial projections for the next few years.

While you'll go into further detail in the next sections, your company description will also briefly cover your intended customers and the products and services you plan to offer. Namely, it will mention exactly why your company's offerings stand out in the industry. This can include any special features, research or technology for which your company is known.

Product or Service Description

Now that you've discussed your company's purpose, you'll go into detail about how your products or services help your customers. This includes explaining features that make your offerings stand out and linking those to clear benefits that would encourage customers to want to buy from you. A benefit could be a functionality that brings convenience to customers or allows them to do something they couldn't otherwise do. It could also be a benefit that appeals to the customers' emotions.

In addition, this section should describe your production process and product life cycle. You'll explain how and where you'll produce your products, what quality standards you'll use and how logistics will work. You'll also want to give an overview of future plans for product upgrades along with an explanation of how often you expect customers to buy what you offer.

Management and Personnel Summary

Showing that you have an experienced and highly capable team can make investors and lenders feel more comfortable working with you, especially if you are a startup. So, you'll want to include in your business plan a list of your team members along with information about their roles, expertise and any notable accomplishments. This includes roles you've already filled as well as advisers and future roles you expect to fill.

For each person discussed, you'll want to include the person's name, job title, education, experience and any special achievements. If the person has worked for any prestigious clients, you could include that as well. You might also create an organizational chart showing these roles in a visual manner by department. Be sure to label each person and include any specific details on how much of the company the person owns.

Customer and Market Analysis

Your business plan will continue with a market analysis where you get to identify your customers and their needs and preferences. Your aim is to determine the target markets that will most often purchase your goods so that you can ensure your sales and marketing strategies will work effectively. Your main market might include those within a particular age group, location, profession, income level or educational level. However, you may have smaller target markets for whom you'll adjust to accommodate them.

Once you have this information, you'll do research to examine your revenue and growth potential by calculating the size of your target market, which qualities they look for in products and services and what their buying preferences look like. You'll also include a discussion on price points and why you think those will allow your market to afford to buy from you.

Along with looking at customers, you should also examine the market as a whole. For example, you might look for statistics that estimate growth in your industry or changing trends in customers' buying habits.

Analysis of Your Competitors

To show your business's viability, you'll create a thorough analysis of your competitors. This requires performing extensive research to learn all about your competitors' strengths and weaknesses as well as your company's opportunities and threats. Often, you'll obtain the information needed from company websites, business directories and the news. You can also use market research tools like GlobalData, World Market Intelligence and Timetric.

Some specific information you might include in the competitor analysis includes:

  • Company reputation
  • Level of customer service
  • Customers' perceptions of product quality
  • Advertising forms used
  • Major developments in the news
  • Production costs
  • Company ratings
  • Any special patents or expertise the competitor possesses
  • Market share

Marketing and Sales Strategies

Once you know the market, your competitors and your customers' needs, you can develop some initial marketing and sales plans.

For your marketing plan, you'll want to explain your product's position in the market and the message you want to communicate to potential customers. You'll explain your pricing methodology in light of what competitors charge and how much your target market would pay. This section will also discuss the methods you'll use to promote your company and track your results. You might also show an initial advertising budget and metrics you'll use.

Your sales plan will go into detail on where and how you plan to sell products and which sales targets you have. For example, you might mention that you'll hire a number of sales representatives to sell in the field, open one or more physical shops or set up an online store. Some basics about your sales pitch could also go here.

Funding Request Information

If your business needs some funding, you'll use this section to tell investors and lenders how much you need and for which reasons. You'll mention whether you plan to sell equity and how much of a stake investors would get in exchange for their money. If you want money through traditional loans, you'll also include this in your desired capital structure.

When making your funding request, you'll want to show future revenue projections along with your typical annual expenses and expected profit margin. A table works well for this since it can show the breakdown in an easy-to-read manner. After showing this information, you'll usually either provide a specific amount or a range of desired funds and state the terms of the arrangement.

Financial Projections and Documents

Using information such as your marketing research, sales projections and desired funding, you can come up with some financial projections and statements to wrap up the discussion of your business's viability. If your business has already been established, you can use existing financial information to plan for the future. In either case, you'll usually want to include projected statements for at least the following three years, and you can choose between making monthly, quarterly or annual projections.

Some important financial statements for a business plan include:

  • Income statements: These will give an estimate of your profit or loss for the future period and can help you make decisions regarding expansion and necessary cuts.

  • Cash-flow statements: You can include these statements for your operating, financing and investing activities to see how much cash will come in and go out of the business.

  • Balance sheets: These will give a predicted picture of your company's assets versus its liabilities at a specific time point.

  • Budgets: Many budgets exist, but a popular one to show on a business plan is the capital expenditure budget that illustrates the fixed assets you plan to purchase.

Appendix of Documents

While you will have already presented most of the important information in your business plan, you'll usually have supplemental documents and charts that you need to let readers see. These include items such as contracts, resumes, financial charts, licenses, patents, permits, case studies, product illustrations and lists of contact details.

Which documents you include can depend on the recipient of the business plan, so what you give to a bank can differ from what you give to a business partner or attorney. For example, your bank would want to see financial documents like a credit report, profit-and-loss statement and possibly bank statements. Investors may want to see your patents and marketing materials to estimate the viability of your business idea.

Alternative Business Plan Formats

While these contents of a business plan are for the most common traditional format, companies are free to adapt it as they see fit. This might mean adding new sections, omitting some or combining sections. There are also alternative business plan models that fit certain types of companies, like startups.

For example, a lean startup might make a concise plan that focuses on the most important company information so that a new business can get going quicker. This kind of plan would feature sections for key partnerships, resources, business activities and customer segments, among others.

References

About the Author

Ashley Donohoe started writing professionally about business topics in 2010. Having eight years experience running all aspects of her small business, she is knowledgeable about the daily issues and decisions that business owners face. She also has earned a Master of Business Administration degree with a leadership and strategy concentration from Western Governors University. Some other places featuring her business writing include JobHero, LoveToKnow, PocketSense, Chron and Study.com.