What is a business plan?

A business plan is a formal projection statement that aims to meet set of company goals. Usually these goals are mostly focused on financial inputs and outputs of the company. It is frequently done for new and existing businesses.

For new business, it is like a feasibility study, but its main focus is centered on how a company will perform in the coming days or years as far as cash is concern. While for existing business, it is sort of a plan on how to fully utilize their existing capital to reach desired profit goal or rate of return.

This is most commonly prepared by top executives or key personnel within the company who have the full knowledge in their respective departments and have it executed strictly on business operations. It is a common practice that it is created before the existing year end because it is intended for the next couple of years of business operation.

Having a business plan is favorable for a company because it will serve as their guide on how to run the business operations as far as budgeting is concern. Meeting the targeted goals in the business plan is considered one hundred percent efficiency and exceeding the quota is excellent.

Due to the frequent fluctuations in the business industry, three to five years projection is considered the ideal period covered in a business plan. In excess of it is observed to have bigger chance of errors in terms of allotted expenses or projected demands.

Business plans includes the mission of the company that consists of both short and long term goals; business strategy that will make its goal achievable; its existing strategic relationships; and the SWOT analysis strength, weaknesses, opportunities and threats.

Some key elements that are showcased in a business plan are the demand/market projection, available resources, financial sources, projected financial statements, manpower requirements, equipments and utilities expenses, direct and indirect materials and overhead expenses.

Basis for the projection are existing data and will be projected using a certain percentage increase per year. These projected percentages of increase are set by the members of the panel involved in the business plan. Mostly, it is derived from industry records or from ratios of past data.

It is truly a fact that business plans are not accurate as compared to actual business results. A mean squared error of 10% or less is still acceptable but higher than 10% is considered critical because usually, projected percentage of increase only varies from 5 to 15 percent.