What is a business plan used for? That fully depends on your business stage and specific business needs.
If you’re just starting, you’ll use a business plan to deal with uncertainty and navigate early doubts and questions. If you’re seeking funding then you’ll be using your business plan to explain your value to potential investors and lenders.
When created correctly, a detailed plan can help you successfully start, manage, and grow your business. Of course, this is just a simple introduction to the purpose of a business plan. Let’s explore and explain the uses of a business plan for each business stage.
How to use a business plan when starting your business
When starting a new business, your business plan is meant to help you explore, define, and connect. You’re evaluating the type of business you’ll be running, who your target market will be, and defining how sections of your business will operate. Here are the key methods for using a business plan to successfully start your business.
1. Evaluate and develop your business idea
Is your business idea valid? Should you even pursue it? Will it sell enough to cover costs and expenses? Who else is doing something like this?
Your business plan will help you answer these critical questions. It guides you through the process of making the right educated guesses for every area of your business. This includes initial financial planning and outlining expected sales, costs of goods sold, expenses, and cash flow. You’ll also set up your strategy, tactics, major milestones, and success metrics.
Evaluating your idea by developing a plan ensures that you’re prepared and minimizing risk. You don’t need to have everything perfectly developed. However, you should know enough to determine if your idea is valuable and sustainable. Shouldn’t you be able to write these down for yourself before you take the risk?
You want to keep things short and simple. Start with a lean business plan, which is a collection of bullet-point lists and projections. Use it for yourself and your team members only, not to show to outsiders.
At the end of the day, your goal is to be able to deal with the big questions. Is this really a good idea? Will it work? Can you feasibly do it?
2. Inform your branding and mission
Writing a business plan doesn’t just help evaluate your business idea. It also ensures that you’re outlining core business operations that allow people to recognize, like, and trust your company. This is encompassed by your branding, value proposition, and company mission.
Branding is all about how your business looks and feels. Your mission statement then helps define what your brand stands for. Then your value proposition officially defines how your products and services effectively serve your potential customers.
Trying to please everybody is usually a shortcut to failure. Creating these upfront streamlines your focus toward the right people. Through effective market research, you create an informed brand position that is designed to reach and resonate with a specific audience.
3. Identify professional gaps
Just like you can’t serve everyone, you also can’t be an expert on everything involved in running a successful business. Maybe you have industry expertise, solid management skills, or a specialized skillset. However, there may be other areas such as accounting, customer service, or marketing that you are completely unprepared to take on.
Creating a business plan allows you to explore operational areas that you are unfamiliar with and assess what skill gaps you need to fill. Even without experience, you’ll attempt to outline the functions of your marketing plan, financial forecasts, sales channels, etc. As part of this exercise, you can also mention specific roles or areas of operation that you need to outsource or fill.
This will directly tie the onboarding of professionals to your milestones and startup strategy. This will help you determine the right time to bring on more people. It will also prove to investors that you are thinking ahead and already understand your weaknesses.
4. Connect with mentors
Your business plan can be a great introduction to working with mentors, counselors, and business development organizations. The best example is in the U.S. Where more than 1,000 Small Business Development Centers offer workshops, counseling, and mentorship for small business owners and entrepreneurs. They really appreciate business owners having a business plan as part of the relationship.
Aside from these formal relationships with mentors, there are informal relationships that can evolve into mentorship over time. It may be another business owner, someone you’re pitching to, an employee, or someone you randomly connect with at a networking event.
This is where your business plan can be a great tool for explaining a business to somebody who might be able to help with it. Just keep a lean and streamlined version of your plan, or even just your executive summary, ready to share.
5. Connect and partner with suppliers
Business owners use forecasts and financial statements to manage their sourcing, suppliers, contractors, and inventory. You’ll anticipate sales and expenses ahead of time, review actual results, and revise accordingly.
Regularly scrutinizing your projected sales and costs can better inform your purchasing decisions and optimize inventory. Too much inventory can be a drain on cash. Too little can hurt production and sales.
Understanding the state of your financials will also make it much easier to approach suppliers and vendors. You’ll be prepared to discuss growth plans, negotiate product or service pricing, and changes to inventory. Your business plan can even be a key part of proposing a strategic alliance with a supplier.
The importance of a business plan in this instance is making sure you’re fully prepared to have these conversations. You’re not scrambling when you suddenly start bleeding cash or take on an excess of inventory. Instead, you’re using your plan to look ahead and prepare.
How to use a business plan to pursue funding
An inevitable step for most existing businesses is the pursuit of funding. It can occur early in the lifespan of a business to help get it off the ground. It may also take years until it becomes necessary for a business to achieve an escalated level of growth. Here are the specific ways that you can use your business plan to successfully gain funding and present it to potential investors.
6. Solidify your funding needs
In years of angel investment, I’ve seen many attempts to raise investment run aground over entrepreneurs and owners not knowing how much money they need. Investors always want to know how much money you need and what you will spend it on. Bankers expect you to apply for loans for some specific amount.
Before you seek out a loan or make a pitch, you’ll need to understand how much funding you require. You can use your business plan to estimate that total. It will also demonstrate why you need that money, what you’ll do with it, and how it will help the business.
That process starts with your educated guesses about sales, costs, expenses, and cash flow. If your projections indicate that you can get by without other people’s money, then heave a sigh of relief because you don’t need investment or loans. If the projects show a deficit, then that deficit is likely how much money you need in funding.
7. Support for loan applications
Your business plan is your best-supporting documentation when submitting a loan application. Most commercial bank loans and especially Small Business Administration-backed loan applications require a business plan as part of the process. Your business plan should include your essential financials including sales, costs, expenses, and cash flow statements. Again, it should also show why you need funding, how you’ll spend it, and how you’ll pay it back.
These days it doesn’t always take a long formal business plan document. Often a lean business plan is enough to support a loan. That will include those essential numbers, plus short summaries of strategy, tactics, major milestones, and metrics.
8. Guide your pitch to investors
I’ve seen founders fail a pitch because they couldn’t answer common questions that come up. Questions such as:
- What are you projecting for marketing expenses?
- How much is your gross margin?
- What’s the headcount assumption?
This can be a death sentence for your chance at funding. Investors can immediately tell if you don’t have a plan to back up your pitch.
Another important myth to dispel is that investors don’t read business plans. The truth is that investors will often reject a proposal based on just a summary, without having read the whole plan. But when they like the proposal, the summary, and the pitch, they need the full business plan to guide due diligence.
In 12 years with an angel investment group, I’ve never seen an investment made without investors reading a business plan in detail. In short, you need to have your business plan prepared. It will enhance your pitch and make it far easier to move on to the next step to gain funding.
9. Manage funding once received
Having a business plan doesn’t just help you gain funding, it also helps you effectively manage it. You’ll have this outlined in an initial use of funds report and actively engage with investors through the ongoing business planning process. This doesn’t mean that you’ll be forced to stick to the strategy you set out with, and are instead able to optimize how to leverage your funding.
Track results including essential numbers and execution. Review those results regularly and revise as necessary. Use that process to provide updates as needed for your bankers or investors. That way you aren’t scrambling to pull together your financial statements and strategy when asked for them.
How to use a business plan to manage and grow your business
The best and most common ongoing use of your business plan is to steer, manage, and grow your business. The business plan is for you to use to better run your business. Think of business planning for your business as a system that mimics navigation in your car.
The long-term goals are the destination. The strategy, tactics, execution, and essential budgets are the route. Tracking and reviewing real-time information are the choices you make when driving. They help you determine if you should adjust you’re route or stay on course.
Recognizing this primary use of the business plan also helps you focus on what you need and don’t need for your business plan. You can opt to work with a lean business plan instead of a big formal business planning document. Here are the key ways you can use your business plan for effective business management and growth.
10. Establish a strategy and the tactics needed to execute it
Use your business plan to clarify your strategy, determine the tactics necessary to support it, and track your execution. No need to write elaborate text explanations. You can deal with just bullet points that summarize and remind you of the main aspects of your plan.
Think of this as a tool for maintaining focus. Most business owners and entrepreneurs want to do everything they can to please every customer. I certainly always did with my business.
But what we learn in the real world is that there is the principle of displacement in small businesses. What we do rules out what we can’t do.
11. Monitor and measure business performance
This ties directly into establishing your strategy and tactics but deserves its own focus. Your business plan is not only useful for defining milestones, key performance indicators, and success metrics. It’s also an invaluable tool for tracking and measuring this data on an ongoing basis.
Having these metrics sit directly within your plan ensures that you’re always linking tactile performance back to your broader strategy. It makes performance reviews and revisions much easier to complete. And should you need funding at a later stage, it makes it much easier to prepare your plan for a professional pitch.
12. Explore potential scenarios
A what-if analysis, more often called a scenario analysis, allows you to explore what might happen to your business in different scenarios.
What if we open another location? What if we change pricing? What if we add another employee? What happens if we don’t reach our sales goals?
You can use your business plan as a tool for scenario analysis. Save your current plan as the most likely scenario. Then leverage your forecasts to develop at least a worst-case and best-case financial scenario. From here, you can outline specific strategies within your plan to take advantage of opportunities and prepare for crisis events.
13. Plan revisions in response to a crisis
Speaking of a crisis, you can easily use your plan to develop an emergency response strategy. For example, when COVID changed everything almost overnight, business owners with well-established business plans were able to adapt far more quickly. Using their plan like a performance dashboard puts strategy, tactics, metrics, milestones, and essential projections all in one place.
This enabled these owners to look quickly at educated guesses on revenue decline and then adjust spending to compensate. They had a view of milestones due, and performance against metrics, and were able to adjust timing, scheduling, and priorities to deal with the crisis.
14. Determine the right time for growth initiatives
Similar to crisis planning, you can also use your business plan to better prepare your business to take on growth initiatives. Rather than blindly guessing if you’re needing to invest further to achieve growth, you can instead coordinate around swings in revenue, costs, expenses, and priorities.
For example, there may be an optimal time to launch a new website, a second location, or even an additional product. Any of these initiatives bring with them an opportunity for substantial gains, as well as an incredible risk if not executed properly. In any of these circumstances, you can use your plan to better understand how introducing a website, location, product, or anything else will affect your business.
What timeframe do you need to gain traction? What’s the necessary ROI that makes it a success? Do you have enough cash to invest in it right now?
You can answer all of these questions, and take full advantage of growth opportunities with your business plan.
15. Update your plan based on actual results
Using your business plan to track your strategy, tactics, and execution is the first step. The next step is to engage in regular plan reviews to maintain an accurate view of your actual results.
The point of reviewing your plan and tracking results is so that you can steer your business with course corrections as required. Plan vs. actual business plan analysis is perfect for this.
When a business plan review turns up results different than expected, you will always have the dilemma of whether to change the plan or the execution. When results are better than expected, then you have to decide whether you change the plan to take advantage of what’s working. And when you have bad news, you have to decide whether the disappointment means changing the plan or just improving execution.
In any case, using your plan in this way means you spend more time reviewing and less time pulling together data.
Additional ways to use your business plan
Outside of this list, there are some special and less common use cases for your business plan. If you’re planning to sell your business, a business plan can help inform buyers beforehand. A business plan can also inform parties involved in a divorce or estate execution. It can also be useful for developing a continuity plan when a business is being passed on to a relative or employee.
Lastly, a business plan is key for determining the valuation of a business for purposes including sale, legal settlements, and taxation. All of these use cases tend to deal with helping streamline legal aspects of selling, transitioning, or valuing a business. Similar to how having a business plan prepped helps you prepare to pursue funding, it can also eliminate the need to do any additional work in these scenarios.
How do you ensure that you actually use your plan? Leverage growth planning
Business planning is the best way to get what you want from your business. It coordinates strategy, tactics, business activities, and teamwork, and pushes results to the forefront. More than likely, you’ll find even more specific use cases for your own business beyond the fifteen listed here.
There are many types of business plans out there, and you don’t always need a formal business plan document. If your full intention is to leverage your plan as an internal management tool, then you should start with a one-page plan.