Objectives of a Business Plan
According to the Small Business Administration, 70 percent of new businesses fail in their first two years. This rate of business failures would seem to make it worthwhile to create a business plan, an objective view of a business, flaws and all.. By providing the information to evaluate feasibility of a business, the plan also supports the entrepreneur's efforts to obtain business financing. Equally important, the plan serves as a baseline with which to evaluate business performance.
Management relies on a business plan to gain consensus on a business's description; its objectives; the market in which it will operate and its strategy to achieve business objectives. Without the business plan, management does not have an effective means to test different theories on how to operate the business and examine the outcome from a financial, marketing and operations perspective. As a result, company officials will find it difficult to properly allocate financial and operating resources.
Planning and control are essential to the long-term survival of a small business. As a company begins operations, the financial portion of the business plan serves as a tool to compare planned with actual operating results. In checking the success of operations, management can identify such issues as increasing costs of production or delivery delays. Once identified, management can take action to correct problems.
Management relies on the comparison of actual to planned results to evaluate the company’s business strategy and determine how the business should proceed in the future. Unsuccessful aspects of the strategy can be discontinued or replaced based on the company’s strengths or weaknesses. For example, a product might be withdrawn from one market and introduced in another, or a new product might be tested for particular customers.
The business plan is also an instrument to acquire business financing. Banks and other lenders use the plan to perform due diligence before granting a company business loans. The plan enables the lenders to understand the owner's vision of the business, the company's goals and methods of operation, each of which infers the comparative financial worth of the business. It is on this basis that lenders and investors allocate financial resources to the business.