Business plan

What it means

A business plan sets out in writing what the company sells, to whom, at what price, at what cost, and where the money comes from until it works. The financial part is three linked statements: a profit plan, a cash flow plan and a projected balance sheet.

It differs from a budget in horizon and purpose: a budget steers one year inside the company, a business plan persuades - a bank, an investor, a partner - and normally covers three to five years.

A business plan is not a feasibility study. The study answers whether the project is worth doing at all, technically and economically. The business plan assumes it is and describes how it will be done, who is responsible for what and what will pay for it. In a new project the study comes first and the plan follows only after a positive answer.

How it works in practice

When you apply for a loan, the bank reads cash flow and instalment cover first, not projected profit. An investor looks at the market and at unit economics. That is why the same plan is usually written at two levels of detail.

A plan is worth something when it is revisited: compared monthly against the actuals from the books and adjusted by a forecast. An untouched file in a folder is a presentation, not a plan.

In a grant application the plan usually has a fixed structure set by the call, and its financial part is tied to the project budget. We prepare it so that the figures will later agree with what the books show, because the grant provider compares planned and actual spending at inspection, and any gaps have to be explained.

What to watch out for

The weak spot is always the same - a revenue ramp that is too optimistic and no stated break-even point. A realistic plan shows how many months the company survives at half the planned revenue, and that is exactly what a bank wants to see.

The second mistake is a plan that mixes amounts with and without tax. Revenue goes in with VAT, costs without it, wages without employer contributions, and income tax is left out altogether. The result looks much better than it will be. Wages should be planned at total employer cost and every amount on the same basis.