Business Plan Law and Legal Definition
Most business plans produced each year are prepared by operating elements of corporations. These plans contribute to a broader corporate strategic or long-range plan which may itself never be widely disseminated. Plans may be elaborate and detailed or may be little more than projections of revenues and estimates of costs ("the budget").
Management gurus and management writers strongly urge every business to prepare an annual business plan, but small businesses rarely do so except under certain circumstances. By their very nature, small businesses tend to be in touch with their markets. Their two or three principals interact constantly; they are always, in a sense, planning. And small businesses have fewer resources to expend on formalities. But small businesses also prepare plans when selling the business or when they seek funding—be that at start-up or when trying to obtain second-tier financing. These plans are, if anything, more complete than annual corporate plans. In addition to the usual content, they will contain a thorough description of the business (rarely included in corporate plans) and also argue that the management team, which is presented in the plan complete with resumes of individuals, is well-suited to achieve the goals of the enterprise.
Aside from these differences, all business plans have the same general content. They discuss the environment, they formulate objectives based on changes in the environment, they lay out alternative actions and the chosen strategy, they estimate outcomes by forecasting revenues, costs, and returns; they specify capital expenditures that will be necessary; finally, they lay out benchmarks over time to measure progress toward achievement of the goals.
It is well to remember that most business plans are written by someone seeking funding—from top management, a bank, the Small Business Administration, a rich individual, or a venture capitalist. Business plans therefore, are documents intended to persuade. For this reason, plans focus on important issues and leave out what might be called "boiler plate." The boiler plate is present, but usually only in the budget details.
Business planning, like all planning, is an attempt to deal with change. Elements of the business likely to operate pretty much as they did the year before do not need special focus.
Business planning therefore begins with an assessment of the environment: the market itself and trends in that market, the competition the business faces and what competitors might do; changes in the supply chain on which the business depends, including technology; changes in the distribution channel by means of which the business sends its product to the customer; and finally changes in the business itself, including its products, its labor, housing, and so on. Sometimes changes in the legal structure are an important issue. The focus of the planning is on change and how change produces opportunities or threats. The environmental assessment results in a few important issues that should be addressed by the plan. Change is a constant; some issues, therefore, should always emerge.
A new business intending to enter a market will, of course, focus on features of the market poorly served by existing suppliers, features of the company's own products that differentiate it, innovations in distribution it intends to exploit, and so on. In such a situation, an important part of the environmental assessment is the business itself—and how it will fit into the environment.
The "issues" that emerge from the environmental assessment are next translated into objectives. A nursery might discover that its revenues are threatened by the repaving of the urban artery on which it sits. The producer of an attractive composting system may discover that price hikes to its popular system will be resisted by its wholesalers. The nursery may set as its objectives at minimum matching its last year's sales. The compost system producer may plan to roll back its price hike.
Broad objectives may be imposed from above. The corporate goal, for instance, may be to increase return on investment (ROI) by minimally 2 percent. This case illustrates the manner in which the "environment" may be an internal factor—namely the parent corporation itself.
Evaluating Alternatives and Making Choices
Once the environment has been evaluated and objectives have been formulated, alternative actions will be considered to reach the objective. The nursery, for instance, may consider substantially increasing advertising, providing deep discounts to attract customers despite traffic delays, or setting up auxiliary "tent sales" in parking lots, by special arrangements, to give its customers easier access elsewhere. The compost system producer may look at cutting costs through reengineering, changed materials, or a new painting system. The corporate element reaching for higher ROI may look at its inventory levels and seek ways to reduce these by "just in time" procurement and/or by speeding up collection of payables: both of which would lift ROI.
All such choices imply variable costs and benefits that must be calculated and compared; they have further intangible costs which have to be assessed. The optimum alternatives are selected for implementation.
In the very nature of things, alternative actions may fall into any of the known categories of business and often into several at the same time: marketing, sales, distribution, warehousing, engineering, patents, production, procurement, distribution, finance, law, personnel, and so on. Manuals and books on the subject tend to focus on major activities, but in practice everything is always on the table.
Budgeting and Implementation
By the time actions to be taken have been decided, the basic planning is virtually done. But business planning tends to be an iterative activity. In the next phase, budgeting, plans are more fully developed. All costs are calculated and revenue forecasts are refined. Quite frequently, in this process, new discoveries are made. If necessary, the process is repeated and actions are modified. Such might be the case, for instance, if the compost system producer discovers that its new painting system will take much longer to install and therefore it must use some other route to cut costs.
The final step in the business plan is to establish benchmarks by which achievement of the objectives can be measured—internally as well as by the source of funding. Benchmarks are often a combination of financial goals by quarter and particular achievements such as, for instance, leasing parking lot space for the nursery's "tent sales."
BUSINESS PLANS AND PLANNING DOCUMENTS
Every business operates under a plan: the absence of a plan is itself a kind of plan. In the small business environment plans tend to be informal: they arise from periodic discussions between the principals and are understood as a kind of consensus in which all individuals involved will be aware of the important issues and expectations. Active planning tends to take place when change is perceived and "something must be done." The transition to formal planning tends to evolve with increasing size—when management realizes that formal communication of intentions will be beneficial and necessary to obtain everyone's cooperation. At first such plans may be in the form of memoranda with the subject "The Year Ahead." They may take the form of a Mission Statement that, in part, specifies goals and broadly outlines the means to their achievement. Later such plans will become ever more structured.
Planning documents come in two forms. One is the "business plan" entrepreneurs use to obtain funding. The other is the "annual plan" that business elements submit to the next level of management for approval. Annual plans may take the form of budget requests with minimal descriptive text or they may be structured documents with "required" rubrics such as "competitive analysis" and "human resources." In many corporations, the planning process is highly structured; planning staff may distribute spreadsheet templates in which budgets must be elaborated and outlines which must be filled in with appropriate text.
The ideal business plan, whether written or merely "understood" will be 1) comprehensive, covering all relevant aspects of the business; 2) structured around changes in the internal and external environment; 3) realistic rather than promotional or defensive in nature; thus it will attempt to document facts; 4) analytical in that it presents alternatives each of which is weighted; and 5) within the competence of the planner to implement and control.
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"Your Business Plan." Phoenix Business Journal. 29 September 2000.
Hillstrom, Northern Lights
updated by Magee, ECDI