What a business plan is

1. A plan is usually written before the business starts trading, then updated as the business grows or as costs and customers change.
2. It gathers the idea, the target market, the marketing mix, the people and premises, and the financial forecasts into one document, so the whole business can be judged at once.
3. The plan is written by the owner or the entrepreneur, and it is read by people outside the business, most often a bank manager or an investor.

Why a business writes a plan

1. To set up a new business: writing the plan forces the entrepreneur to answer the practical questions before any money is spent: who the customers are, what price they will pay, where the business will trade and what equipment it needs.
   1. Problems such as a supplier being too expensive or demand being seasonal show up on paper, where they cost nothing to fix, rather than in the first trading month.
2. To raise finance: a bank or an investor will not hand over money on the strength of an idea, so the plan is the evidence that the business can repay a loan or produce a return.
   1. The financial forecasts matter most to a lender, because they show whether the business expects enough cash coming in each month to cover the repayments.
3. To set objectives: the plan turns a vague ambition such as "do well" into targets the owner can measure, for example reaching £120,000 of sales in year one or opening a second branch within three years.
4. To organise the functional areas: the plan states what marketing, operations, finance and human resources each have to do, and when, so the parts of the business fit together instead of pulling in different directions.
   1. If the plan promises a launch in April, marketing knows when to advertise, operations knows when stock must arrive and finance knows when the money for that stock is needed.

Benefits of business planning

1. Lower risk of failure: researching the market and the costs in advance means fewer surprises, so the business is less likely to run out of cash in its first year.
2. Clear direction for staff: employees know what the business is trying to achieve and what their part of it must deliver, which cuts wasted effort and duplicated work.
3. A reference point for monitoring: actual sales and costs can be compared against the forecast each month, so a shortfall is spotted while there is still time to cut spending or change price.
4. Better decisions: with the market research and the costings written down, the owner chooses between options using evidence rather than instinct.

Drawbacks of business planning

1. It takes time. Market research, costings and forecasts can take weeks, and for a sole trader that is time not spent selling or serving customers.
2. It costs money. An owner who pays an accountant or a consultant to prepare the forecasts spends cash the new business can barely spare.
3. It is built on forecasts. Sales and costs in the plan are estimates, and if the estimate of demand is too optimistic the whole plan, including the cash flow forecast, is wrong.
4. It goes out of date. A new competitor, a rent rise or a change in what customers want can make a plan written six months ago describe a market that no longer exists.
5. It can make the owner inflexible. Sticking to the written plan when sales show customers want something different means missing an opportunity the plan never predicted.