What's the Purpose of a Business Plan?

A business plan for a startup venture is most successful if it serves three purposes: attracting outside funding, helping the managers think through strategy, and providing a road map for future action and evaluation. Many business plans end up serving only one or two of these purposes, leading to problems for the business and contributing to the high rate of new business failure.

Attracting Outside Funding

Most startups cannot launch without funding from investors and lenders beyond the founders of the company. For most funders, reading a business plan is an important preliminary (but not the only) step to choose who to fund. The business plan must attempt to convince funders to move on to direct talks with the founders, to go through their own process of due diligence, and to move on to negotiations over the financing deal. The business plan cannot convince funders to give money on its own, but it can easily kill the company’s chances of getting outside funding it finds to be lacking.

Thinking Through Strategy

A business plan also serves the purpose of letting entrepreneurs “make mistakes on paper” before making them in wasted dollars, cents, and time. Putting the plan on paper allows time to consider how the elements of a strategy complement the research done and the resources of the firm. It also allows advisors and other managers to give feedback on the plan of action.

Creating a Road Map

When kinks are worked out, the plan becomes an excellent tool to direct the company with. It should include the high level actions the firm must take, which can then be broken down into specific schedules and actions by the company’s manager or managers. As time goes on, managers can return to the plan and its financial projections to judge the progress of the company, how successful the planning was, and whether company is following the plan well.