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Why Are Business Plans Important?

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  • 0:02 What Is a Business Plan?
  • 1:23 Proposal to Lenders
  • 2:07 Proposal to Investors
  • 2:58 Attract Prospective Employees
  • 3:36 Internal Road Map
  • 4:14 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define a business plan, talk about why a business plan is important, and explore its major components. We'll also discuss what information is useful to external and internal users.

What Is a Business Plan?

Jared has created a widget to make automobiles driverless. He just received a contract from a major car manufacturer for one million widgets. Jared has several hundred prototypes, but he needs to produce widgets based on the car manufacturer's specifications. While he's excited about the opportunity and how much money he'll make after meeting the requirements of the contract, he needs money now to fund business operations and produce the one million widgets.

Jared visits a bank for a loan and meets with Nicole, a loan officer. Jared tells her about his widget and shows her the contract. Nicole's confident the bank can help him with the loan. She asks him to complete an application and submit a business plan. Jared asks, 'What's a business plan?'

Nicole shares that a business plan is a road map of the business's strategic goals, how those goals will be achieved, and an estimation of sales and costs. She tells Jared a business plan is essential for lenders, such as a bank, to determine if the business is viable for a business loan. Potential investors will want to know about the business and the marketing plan. Also, since Jared will need sophisticated employees for this contract, the business plan can provide information on how the company will be managed, which may help attract these types of employees.

Proposal to Lenders

Lenders, such as a bank, review several components of a business plan. The first is the business idea. Lenders need to have a solid understanding of the type of business and the owner's background and skills to support the operations.

Another important component are the financials. Lenders are interested in sales, costs, and growth projections. Since Jared has an extensive contract from a major car manufacturer, it's fairly simple to compile this type of data. However, if you do not have a contract and your business is still in the planning stages, it's important to provide realistic estimates. Additionally, lenders and investors will want to know how you plan to market your product to meet those projections.

Proposal to Investors

Investors, such as businesses and individuals, can also provide the funding to start a business. In addition to financials, they are interested in product marketing. In the market analysis section, lenders and investors want to know about competitors. What competitive advantages does Jared's business have over competitors? What are Jared's strengths and weaknesses? Strengths are defined as what the business does well, and weaknesses are areas that can use improvement.

As it relates to selling, the business plan answers questions such as the following: What type of advertising mediums will be used to increase product visibility? And what type of selling method will Jared's company use to market the product? Examples of selling methods include selling the product from brick and mortar stores with online retail or through direct marketing.

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