what are disadvantages of creating a business plan

The Disadvantages of a Business Plan

by Kenneth Black

Published on 26 Sep 2017

The advantages of a business plan are very clear: it provides direction and strategy for your business, is often necessary to get financing and is a way to keep employees on track. While these advantages are all valuable, there also are some disadvantages to a business plan. Understanding these and how to avoid or correct them is key in determining the overall success of any plan. Doing this takes time and energy, but not doing it can be risky in the long run.

Discouragement

In the world of business, there are so many unknowns that it is comforting to have something on paper that will help determine whether or not your business will be successful. Many people may get so discouraged by what is revealed in the business plan they give up before they even open the doors. If you see opportunities beyond what the business plan reveals, taking a risk may be the only way to find out if you're right.

Cutting Corners

Many business plans fail because those involved do not spend the time or energy, or have the expertise, necessary to make the plan comprehensive enough to have true value. Shortcuts are often taken, according to Belmont University. An incomplete business plan could lead you to invest resources unwisely and cause a financial collapse.

In business, time is money, and coming up with a business plan does nothing to directly sell a product or service. Therefore, many may consider the time it takes to develop a business plan as a big disadvantage, and it could be. Coming up with a comprehensive business plan could take 400 or 500 hours, according to Cayenne Consulting. If you work 40 hours per week, this process could take 10 straight weeks at a minimum.

Tunnel Vision

In some cases, a business plan may provide employees, or even the owner, with a case of tunnel vision. In this scenario, other avenues of business opportunity may not be explored. For example, if you are starting a chocolate shop in a tourist area, your business plan may focus strictly on the traditional retail side of the equation. You may ignore an entire Internet side business simply because it is not in your business plan. Having a plan that is too narrow in scope could be a big disadvantage.

Some service companies specialize in helping you write a business plan. In fact, a consultant will meet with you, get the details of what you hope to do and where you hope to do it, conduct all the rest of the research necessary and then write a plan. Depending on how comprehensive you want this plan to be, it can be a very expensive option.

In the end, choosing whether or not to write a business plan or have one written is a choice you, as the business owner, can make. While there are some disadvantages to a business plan, you may have no choice but to have one in the long run. If you can self-finance the business, this becomes less of a necessity, but very few people can do it.

Home » Pros and Cons » 14 Pros and Cons of a Business Plan

14 Pros and Cons of a Business Plan

Should you create a business plan? Most people will say that you should have at least some sort of outline that helps you guide your business. Yet sometimes an opportunity is so great that you’ve just got to jump right in and grab it before it disappears. If you want funding or growth to be sustainable, however, there is a good chance that you’ll need to create a business plan of some sort in order to find success. Here are some of the pros and cons of a business plan to consider as you go about the process of creating and then running your business.

What Are the Pros of a Business Plan?

A business plan is a guide that you can use to make money. By understanding what your business is about and how it is likely to perform, you’ll be able to see how each result receive can impact your bottom line. With comprehensive plans in place, you’ll be prepared to take action no matter what happens over the course of any given day. Here are some more benefits to think about.

1. It gives you a glimpse of the future. A business plan helps you to forecast an idea to see if it has the potential to be successful. There’s no reason to proceed with the implementation of an idea if it is just going to cost you money, but that’s what you do if you go all-in without thinking about things. Even if the future seems uncertain, you’ll still get a glimpse of where your business should be.

2. You’ll know how to allocate your resources. How much inventory should you be holding right now? What kind of budget should you have? Some resources that your business needs to have are going to be scare. When you can see what your potential financial future is going to be, you can make adjustments to your journey so that you can avoid the obstacles that get in your way on the path toward success.

3. It is necessary to have a business plan for credit. In order for a financial institution to give you a line of credit, you’ll need to present them with your business plan. This plan gives the financial institution a chance to see how organized you happen to be so they can more accurately gauge their lending risks. Most institutions won’t even give you an appointment to discuss financing unless you have a formal business plan created and operational.

4. A business plan puts everyone onto the same page. When you’re working with multiple people, then you’re going to have multiple viewpoints as to what will bring about the most success. That’s not to say that the opinions of others are unimportant. If there isn’t any structure involved with a business, then people with a differing opinion tend to go rogue and just do their own thing. By making sure that everyone is on the same page with a business plan, you can funnel those creative energies into ideas that bring your company a greater chance of success.

5. It allows others to know that you’re taking this business seriously. It’s one thing to float an idea out to the internet to see if there is the potential of a business being formed from it. Creating a business plan for that idea means you’re taking the idea more seriously. It shows others that you have confidence in its value and that you’re willing to back it up. You are able to communicate your intentions more effectively, explain the value of your idea, and show how its growth can help others.

6. It’s an easy way to identify core demographics. No matter what business idea you have, you’re going to need customers in order for it to succeed. Whether you’re in the service industry or you’re selling products online, you’ll need to identify who your core prospects are going to be. Once that identification takes place, you can then clone those prospects in other demographics to continue a growth curve. Without plans in place that allow you to identify these people, you’re just guessing at who will want to do business with you and that’s about as reliable as throwing darts at a dartboard while blindfolded.

7. There is a marketing element included with a good business plan. This allows you to know how you’ll be able to reach future markets with your current products or services. You’ll also be able to hone your value proposition, giving your brand a more effective presence in each demographic.

What Are the Cons of a Business Plan?

A business plan takes time to create. Depending on the size of your business, it could be a time investment that takes away from your initial profits. Short-term losses might happen when you’re working on a plan, but the goal is to great long-term gains. For businesses operating on a shoestring budget, one short-term loss may be enough to cause that business to shut their doors. Here are some of the other disadvantages that should be considered.

1. A business plan can turn out to be inaccurate. It is important to involve the “right” people in the business planning process. These are the people who are going to be influencing the long-term vision of your business. Many small business owners feel like they can avoid this negative by just creating the business plan on their own, but that requires expertise in multiple fields for it to be successful. A broad range of opinions and input is usually necessary for the best possible business plan because otherwise the blind spots of inaccuracy can lead to many unintended consequences.

2. Too much time can be spent on analysis. Maybe you’ve heard the expression “paralysis by analysis.” It cute and catchy, but it also accurately describes the struggle that many have in the creation of a business plan. Focus on the essentials of your business and how it will grow. Sure – you’ll need to buy toilet paper for the bathroom and you’ll want a cleaning service twice per week, but is that more important than knowing how you can reach potential customers? Of course not.

3. There is often a lack of accountability. Because one person is generally responsible for the creation of a business plan, it is difficult to hold that person accountable to the process. The plans become their view of the company and the success they’d like to see. It also means the business plan gets created on their timetable instead of what is best for the business and since there isn’t anyone else involved, it can be difficult to hold their feet to the fire to get the job done.

4. A great business plan requires great implementation practices. Many businesses create a plan that just sits somewhere on a shelf or on a drive somewhere because it was made for one specific purpose: funding. When a solid business plan has assigned specific responsibilities to specific job positions and creates the foundation for information gathering and metric creation, it should become an integral part of the company. Unfortunately poor implementation has ruined many great business plans over the years.

5. It restricts the freedom you once had. Business plans dictate what you should do and how you should do it. A vibrant business sometimes needs its most creative people to have the freedom to develop innovative new ideas. Instead the average plan tends to create an environment where the executives of the company dictate the goals and the mission of everyone. The people who are on the front lines are often not given the chance to influence the implementation of the business plan, which ultimately puts a company at a disadvantage.

6. It creates an environment of false certainty. It is important to remember that a business plan is nothing more than a forecast based on plans and facts that are present today. We live in a changing world where nothing is 100% certain. If there is too much certainty in the business plan that has been created, then it can make a business be unable to adapt to the changes that the world is placing on it. Or worse – it can cause a business to miss an exciting new opportunity because they are so tunnel-visioned on what must be done to meet one specific goal.

7. There are no guarantees. Even with all of the best research, the best workers, and a comprehensive business plan all working on your behalf, failure is more likely to happen than success. In the next 5 years, 95 out of 100 companies that start-up today will be out of business and many of them will have created comprehensive business plans.

The pros and cons of a business plan show that it may be an essential component of good business, but a comprehensive plan may not be necessary in all circumstances. The goal of a business plan should be clear: to analyze the present so a best guess at future results can be obtained. You’re plotting out a journey for that company. If you can also plan for detours, then you’ll be able to increase your chances to experience success.

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Advantages and Disadvantages of Business Plan

Every business starts with a business plan because starting a business without a plan is like going on a chilled winter night without warm clothes and since starting a business involves money and where there is money one cannot take chances of going ahead without a plan. In order to understand it better let’s look at some of the advantages and disadvantages of business plan –

Advantages of Business Plan

• The first and foremost advantage of business plans is that once the company has business plan ready then only it can take it forward and present it to prospective investors who in turn if they like the plan will finance the business plan and we all know how important capital is for starting a business because without capital no business can start.
• Another benefit of business plans is that it helps the promoter in getting things right because if plans are in mind only then it can lead to confusion as mind has dozen of ideas but once the plan in mind is put into paper in the form of business plan than it gets more clarity and the owner can concentrate on one plan only rather than thinking about dozen of plans.
• Another advantage of the business plans is that it helps in prioritizing the work and also putting the right people for right job which in turn increases the possibility of the business plan being a success as the owner can keep track of milestones of business as envisaged in the business plan.

Disadvantages of Business Plan

• The biggest disadvantage of the business plans is that it involves time and expenses and as far as small businesses are concerned they neither have money and expertise to make a proper business plan which in turn can lead to business suffering more rather than gaining from the business plan.
• Another drawback of it is that due to the presence of business plans the owners may lose flexibility and become rigid also they will keep sticking to the business plan even if it detrimental to the interests of the business. So for example, if business plan has envisaged 10000 units of production but due to change in consumer taste sales of only 5000 units can be done and if the owner sticks to the business plan then it will be a loss making the decision. Hence a good business plan is one which has the scope of flexibility in it.
• Another disadvantage of business plans is that though plans are good to see and hear but execution of those plans has many problems and uncertainties right from procurement of finance, production related uncertainty, marketing and selling challenges and many other problems and it is next to impossible that plans are carried out in exact fashion as set out by the top management or the owner of the company.
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The Disadvantages of Business Planning

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Business Planning as a Function of Management

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It was Benjamin Franklin who immortalized the words “by failing to prepare, you are preparing to fail.” Then again, the wise sage died 128 years before the pandemic of 1918 and 230 years before the Coronavirus pandemic struck in 2020. As the only founding father to have signed all four of the planning documents that established the United States, small-business owners like yourself might be wondering what Franklin, in all his wisdom, would say about the wisdom of short-, long-term and strategic planning. After all, an uncontrolled “external event” like a pandemic can knock any carefully researched, thoughtfully written plan right off its mahogany stand. Then what?

Plan with a Purpose

Of all people, Franklin would have been able to impart valuable lessons to today’s small-business owners about the value in preparing for the immediate and long-term future. He was instrumental in four key planning documents, including the Declaration of Independence and the U.S. Constitution. The Constitution continues to be a “living document,” guiding decisions in all three branches of the federal government.

On a smaller scale than creating a new government, there are many advantages to planning for your small business, according to Lumen Learning . Planning can direct action, which can be invigorating as it coordinates activities to ensure specific outcomes are achieved. It can rouse motivation and commitment to a cause. Once people know where they’re headed, they’re much more likely to fall into line.

Planning can also set performance standards and benchmarks so it’s easier to periodically review goals and objectives. It improves the likelihood of resource allocation, almost like a falling domino. Often the biggest obstacle to any big idea are the resources necessary to move off of square one; planning can give any big idea a sense of urgency.

Note the Disadvantages of Planning

As small-business owners now know, a pandemic is just one external factor that can upend the potential advantages of planning. Political unrest, strikes and natural calamities are other such factors. But if you confine this exercise to internal factors alone, the disadvantages of planning still add up quickly. Management Study Guide notes that these disadvantages include:

• inflexibility – a feeling that you must adhere to the plan and never deviate
• discouraging creativity, innovation, initiative and experimentation after the plan is set
• breeding a false sense of security and tunnel vision, stemming from putting too much stock in the plan and not seeing or reacting to changing conditions
• blinding employees to opportunities that were not foreseen and addressed
• being a time consuming process, requiring research, analysis and interpretation
• being expensive, drawing resources away from a business when they could be used on other things
• being rendered obsolete or irrelevant in a heartbeat

Manage the Disadvantages of Planning

One lesson runs consistently throughout this list: Planning should be a fluid process, constantly monitored and adjusted so that the plan remains timely and relevant. But back up the reality check one step further. Simply producing a planning document is no guarantee it will trigger results – no more than purchasing several bags of groceries guarantees a spectacular dinner. Many ingredients go into the outcome.

If you've weighed the pros and cons of planning and are feeling ambivalent, IgniteSpot Accounting says you may wish to try tempering the disadvantages of planning by a few methods. Feed your business' short-term goals into its longer-term goals. They should peacefully co-exist. Hold up all goals against your mission and vision statements to test them for relevance.

Involve employees in the planning process, and encourage them not to hold back. Make sure to integrate deadlines and defining roles and responsibilities – inclusions that are often left out of plans. (Is it any reason, then, that they fail to produce?) Plan for benchmarks that force you to stop and evaluate how the plan is doing, as well as milestones that your employees can celebrate.

You can also hire a consultant to come in and help if you feel as though a plan has run off the rails. Sometimes all that's needed is a quick fix by an outsider – who can see things dispassionately – for the plan to get back on track. Finally, plan (yes, on top of planning) for pivots, not just mere distractions. Pivots require a swift change in direction, not just an acknowledgment that “Ah yes; things have changed.”

It's entirely possible that the last tip may be one of the greatest lessons of the COVID-19 pandemic – and a crucial teaching moment for small-business owners who wish to create their own "living documents." Franklin, a businessman himself, could probably identify. As he said: “Either write something worth reading or do something worth writing.”

• History.com: Benjamin Franklin
• Lumen Learning: Pros and Cons of Planning
• Management Study Guide: Disadvantages of Planning
• IgniteSpotAccounting: Why You Should Set Better Long-Term Goals

Mary Wroblewski earned a master's degree with high honors in communications and has worked as a reporter and editor in two Chicago newsrooms. Then she launched her own small business, which specialized in assisting small business owners with “all things marketing” – from drafting a marketing plan and writing website copy to crafting media plans and developing email campaigns. Mary writes extensively about small business issues and especially “all things marketing.”

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Business Plan

Who should write a business plan, pros and cons of a business plan, the anatomy of a business plan, .css-uphcpb{position:absolute;left:0;top:-87px;} what is a business plan, definition of a business plan.

A business plan is a strategic document which details the strategic objectives for a growing business or startup, and how it plans to achieve them.

In a nutshell, a business plan is a written expression of a business idea and will describe your business model, your product or service, how it will be priced, who will be your target market, and which tactics you plan to use to reach commercial success.

Whilst every enterprise should have a plan of some sort, a business plan is of particular importance during the investment process. Banks, venture capitalists, and angel investors alike will need to see a detailed plan in order to make sound investment decisions — think of your plan as a way of convincing them your idea is worth their resources.

Roadmapping From A to Z

Business plans can also be useful as a guide to keeping a new business on track, especially in the first few months or years when the road ahead isn’t too clear.

Starting a business isn’t an exact science. Some companies organically develop out of trial and error, while others are plotted out from start to finish.

So if you’re asking whether your company needs a lengthy business plan, the answer would be ‘no’. That said, there are definitely a few situations in which writing a plan makes sense and can help increase the chances of a business becoming successful:

In situations when the market is new and untested — or simply volatile — it can be very helpful to have a business plan to refer back to when the road ahead isn’t clear.

For those who have an exciting business idea but haven’t necessarily distilled it down into black-and-white. Writing a business plan is a great way to look at a concept from all angles and spot any potential pitfalls.

How to write a business plan?

The most important step in writing a business plan is to identify its purpose.

Who are you trying to attract with it, and why?

Here are a few key pointers for writing a business plan:

Are you looking to secure a bank loan, get funding from private investors, or to lure skilled professionals to join you?

Include a brief history of your business, the concept, and the products or services. Keep it professional and transparent.

Don’t exaggerate your experience or skills, and definitely don’t leave out information investors need to know. They’ll find out at some point, and if they discover you lied, they could break off their involvement. Trust is crucial.

Explain what the product or service your business offers in simplistic terms.

Watch out for complex language and do whatever you can to prevent readers from becoming confused.

Focus on the benefits the business offers, how it solves the core audience’s problem(s), and what evidence you have to prove that there is a space in the market for your idea. It’s important to touch on the market your business will operate in, and who your main competitors are.

Another essential aspect of writing an effective business plan is to keep it short and sweet. Just focus on delivering the crucial information the reader has to know in order to make a decision. They can always ask you to elaborate on certain points later.

Still, deciding whether or not a business plan will benefit you at this stage of your venture?

Let’s look at a few reasons why you might (or might not) want to write a business plan.

A business plan will help you to secure funding even when you have no trading history. At the seed stage, funding is all-important — especially for tech and SaaS companies. It’s here that a business plan can become an absolute lifesaver.

Your business plan will maintain a strategic focus as time goes on. If you’ve ever heard of “mission creep”, you’ll know how important an agreed can be — and your business plan serves exactly that purpose.

Having a plan down in black and white will help you get other people on board . Again, with no trading history, it can be hard to convince new partners that you know what you’re doing. A business plan elegantly solves this problem.

Your business plan can cause you to stop looking outward. Sometimes, especially in business, you need to be reactive to market conditions. If you focus too much on your original business plan, you might make mistakes that can be costly or miss golden opportunities because they weren’t in the plan.

 A lot of time can be wasted analyzing performance. It’s easy to become too focused on the goals and objectives in your business plan — especially when you’re not achieving them. By spending too much time analyzing past performance and looking back, you may miss out on other ways to push the business forward.

A business plan is out of date as soon as it’s written. We all know how quickly market conditions change. And, unfortunately, certain elements in your business plan may have lost relevance by the time you’re ready to launch. But there is another way — by transferring your strategic plan into an actionable roadmap , you can get the best of both worlds. The business plan contains important detail that is less likely to change, such as your mission statement and target audience, and the roadmap clarifies a flexible, adaptable, route forward.

So, you’ve decided to write a business plan — a great choice! 

But now comes the tricky task of actually writing it. 

This part can be a little frustrating because there is no one-size-fits-all template appropriate for all business plans. The best approach, in fact, is to look at common ingredients of a business plan and pick out the ones that make sense for your venture.

The key elements of a great business plan include:

An overview of the business concept . This is sometimes referred to as an executive summary and it’s essentially the elevator pitch for your business.

A detailed description of the product or service. It’s here that you’ll describe exactly what your core offering will be — what’s your USP , and what value do you deliver?

An explanation of the target audience. You need a good understanding of who you’ll be selling your product or service to, backed up by recent market research.

Your sales and marketing strategy. Now that you know who you’re targeting, how do you plan to reach them? Here you can list primary tactics for finding and maintaining an engaged client base.

Your core team . This section is all about people: do you have a team behind you already? If not, how will you build this team and what will the timeline be? Why are you the right group of people to bring this idea to the market? This section is incredibly important when seeking external investment — in most cases, passion can get you much further than professional experience.

Financial forecasts . Some investors will skim the executive summary and skip straight to the finances — so expect your forecasts to be scrutinized in a lot of detail. Writing a business plan for your eyes only? That’s fine, but you should still take time to map out your financial requirements: how much money do you need to start? How do you plan to keep money coming in? How long will it take to break even ? Remember, cash is king. So you need a cash flow forecast that is realistic, achievable and keeps your business afloat, especially in the tricky first few years.

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The Advantages and Disadvantages of Different Business Plan Strategies

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Introduction

A business plan strategy is a document that outlines and outlines the goals and objectives of a business. It also contains information about the company's objectives, strategies, and resources. As business owners or entrepreneurs, it is important to develop strategies that will allow the business to reach its goals in the long-term.

There are two primary strategies when it comes to business planning: complete and incomplete. A complete business plan strategy covers all aspects of the business, including management, marketing, finance, operations, and more. An incomplete business plan strategy typically focuses on one or two aspects of the business, such as finance or marketing.

Advantages and Disadvantages of Complete Strategies

Creating a business plan that takes a complete approach involves including all information wherein all factors are considered. When a business plan is created with a complete strategy, the goals and objectives of the organization are stated clearly and in detail. Furthermore, when taking a more detailed approach, every aspect of the business strategies is taken into account and can account for facets such as business environment, competitive market positioning, and supportive channels. These strategies are designed to enhance visibility, credibility, and reliability within the markets in which the organization looks to compete.

Disadvantages

The major disadvantage of developing a complete approach business plan is the high cost and time involved. Generally, a complete plan comprises of a complex set of components and intensive research. This includes research on technology, people, and competitive landscape, that can be quite expensive. Additionally, a complete business plan could take a few months and possibly even more than a year for completion. Furthermore, although a complete plan provides clear direction, since it focuses on more elements, it becomes very difficult and challenging to track progress. A complete approach can be too overwhelming at times, especially for smaller businesses.

Advantages and Disadvantages of Incomplete Strategies

Businesses that prefer an incomplete business plan strategy often find it less time consuming and more cost effective to implement. They do not invest more time into creating complex goals or analysis, which helps to save time, energy, and money. In addition, they allow businesses to easily adjust to changes in their markets or to develop in different directions without having to invest too much in planning.

A disadvantage of incomplete strategies is that they may not account for the true state of the business's operations due to their simpler set of objectives. This type of strategy could also fail to consider external influences, such as changes in the competitive environment, or the interests of stakeholders. Ultimately, developing an incomplete strategy can lead to inadequate or misdirected goals, and may prevent a successful outcome.

In addition, due to their simplified nature, incomplete strategies may not be able to thoroughly recognize potential risks and exploits that could ensue. This could lead to volatile decision making and a chaotic business environment. Furthermore, the strategies may lack the structure, focus, and vision that are necessary for any long-term business success.

Considerations for Choosing Between Complete and Incomplete Strategies

Choosing between complete and incomplete business plan strategies ultimately comes down to two major considerations: size and scale of business, and type and scope of planning.

Size and Scale of Business

The size and scale of your business is a key factor when deciding between complete and incomplete strategies. For smaller and more agile operations, an incomplete strategy may be preferable, as it requires less start-up cost and can be implemented quickly. And while larger operations are typically better-suited to a comprehensive approach, incomplete strategies may still be applicable depending on the nature of the business.

Type and Scope of Planning

The type and scope of planning is also a major factor when choosing between a complete and incomplete strategy. For example, companies that require detailed and elaborate plans may find that a complete strategy is more effective and efficient. Alternatively, less complex companies may find that an incomplete strategy is more suitable to their needs.

In addition to size and scope of business and type and scope of planning, there are a number of other considerations to take into account when selecting between complete and incomplete strategies. Such considerations may include budget, resources, timeline, and overall objectives. Ultimately, the strategy chosen should be tailored to the unique needs of the organization.

Examples of Suitable Industries for Complete Strategies

When it comes to creating a business plan, there is no one-size-fits-all approach. For some industries, a more complete strategy may be best while a more incomplete one may be better suited for others. Two industries that may require a more complete approach include the financial sector and the manufacturing industry.

Financial Sector

The financial sector is one of the most highly regulated industries in the world. When it comes to creating a business plan, it is critical to take a comprehensive approach that understands the legal and regulatory frameworks that govern this industry. A financial business plan should include an in-depth analysis of the competitive landscape as well as a detailed roadmap for how the business plans to achieve its financial goals. The business plan should also outline the risks associated with entering the industry and how the business will mitigate them.

Manufacturing Industry

The manufacturing industry is all about efficiency and cost savings. A successful manufacturing business plan must take a holistic view of the whole manufacturing process and include a detailed cost-benefit analysis. It should outline the costs associated with manufacturing, including capital costs, labor costs, raw materials, and other overhead expenses. The plan should also provide a clear timeline for when the business expects to achieve certain production goals and be able to generate revenue.

The manufacturing business plan should also include strategies for ensuring quality across the production process and meeting safety standards. A good plan should also include contingency plans for dealing with unexpected challenges and unexpected markets.

Examples of Suitable Industries for Incomplete Strategies

Incomplete business strategies can be a great fit for certain industries depending on the specific type of services or products they provide. The following is a list of two industries that are particularly suited for an incomplete business plan strategy.

Food & Beverage Service

Food and beverage service industries such as restaurants, catering, and cafes can benefit from an incomplete business plan strategy. As customers' tastes change drastically and the market shifts, businesses in these industries often face an ever-evolving landscape. By not having a rigid business plan to adhere to, these businesses can quickly adapt their approach and reevaluate their goals.

Likewise, retail businesses can also use an incomplete strategy as the market rapidly changes due to customer demands as well as technological advancements. With a plan that is not set in stone, such businesses can easily introduce new products or services to their customers as the need arises and keep up with the competition.

Choosing a business plan strategy is essential for companies that wish to achieve their business goals. There are several options available, including complete and incomplete strategies. Each strategy is beneficial in different scenarios, but both should be thoroughly considered in order to determine which is the best fit for a company.

Summary of Complete and Incomplete Strategies

A complete strategy involves strategizing enterprise-wide goals and implementing the necessary tactics to achieve them. This kind of strategy is best suited to businesses that have well-defined goals, the right resources, and the capacity to implement a long-term plan. An incomplete strategy, on the other hand, emphasizes flexibility and adapting to changing business needs. It is best suited to companies that need to adjust their plans quickly, as the market shifts.

Final Considerations for Choosing a Strategy

When choosing between a complete and incomplete business plan strategy, business owners should take into account their goals, resources, and needs. It is essential to evaluate each option carefully in order to determine which strategy is best suited for the company's specific needs. Additionally, business owners should also consider any outside factors, such as the current market and competitors, that could influence their decision.

By understanding the differences between complete and incomplete business plan strategies, companies can make an informed and effective decision for their business. With the right strategy in place, businesses can develop and grow on their own terms.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, how often should a business plan be updated, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

• A business plan is a document describing a company's business activities and how it plans to achieve its goals.
• Startup companies use business plans to get off the ground and attract outside investors.
• For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
• There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

• Executive summary: This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
• Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
• Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
• Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
• Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

A business plan is not a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections to begin with. Markets and the overall economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All of this calls for building some flexibility into your plan, so you can pivot to a new course if needed.

How frequently a business plan needs to be revised will depend on the nature of the business. A well-established business might want to review its plan once a year and make changes if necessary. A new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

U.S. Small Business Administration. " Write Your Business Plan ."

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What are the advantages and disadvantages of a business plan?

Almost every business starts with a business plan. These documents are used to map out the steps you want to take to get your business off the ground. However, do these strategy documents work for all businesses?

Whether you’re an entrepreneur or an investor, business plans are considered an essential part of starting a new business . For business owners and other stakeholders, it acts as a manual that can be used to chart a business’ success. Similarly, business plans can generate confidence, helping to convince potential lenders that investment is a risk worth taking.

However, business plans can also be expensive and time-consuming to create. Additionally, there is also no guarantee that a business will succeed just because a sound plan has been put in place.

To help you decide if a business plan would benefit your new venture, this guide runs through the main advantages and disadvantages.

The advantages of a business plan

Although a business plan takes time and money to create, it can help save both in the future if done properly. Below we take a look at some of the key advantages of creating a business plan:

1. It helps you forecast future steps The primary purpose of a business plan is to give you (and investors) an idea of whether your business has the potential to be successful. By mapping out your next steps and setting milestones, you can spot strengths and weaknesses in your ideas and set targets. This is helpful as it may prevent you from proceeding with a business idea that may end up costing you money.

On the other hand, these initial forecasts may provide the positive projections you need to actually get started and even attract outside investment. Even if your business plan produces an uncertain forecast, it still provides a small glimpse of the direction your business wants to head in and how it may perform on the way. This is valuable information, both for business owners and third-party stakeholders.

2. It is required if you want to apply for credit In order to secure a business loan from an official lender, a business plan is essential. Most banks will not even meet with you to discuss financing unless you have a business plan to present. This is because financial institutions like banks and credit unions need a way to accurately gauge their lending risks.

A well-thought-out business plan gives you the opportunity to show lenders how organised and prepared you are. It should explain how your business will use any capital you are lent and how you intend to make repayments. This level of detail can help to instil confidence in your business by persuading lenders you are a good risk.

3. It helps you to identify future cash flow issues A business plan should contain detailed cash flow forecasts and analysis. This shows potential lenders how money is expected to travel in and out of your business. It can also be useful for owners to determine if/when the business is expected to have cash flow problems under certain strategies. Having this information at hand can make it easier to financially plan, ensuring the business is always properly funded.

4. It helps you to allocate resources One of the biggest challenges for new business owners is resource management. From how much inventory you should buy to setting initial budgets, these decisions can be difficult. A business plan encourages you to create a workable budget and allocate resources before you start spending. This ensures you can afford everything you need and you don’t overspend before your business can start making money.

5. It helps you better understand your competition Creating a business plan requires a great deal of industry research. While you may think you have a strong handle on what you want your business to achieve, only by analysing your competition will you be able to see the full picture. A business plan can help you produce highly valuable insights into competitor demographics. This includes existing consumer trends and preferences, as well as costing insights. These findings are not always viable without conducting business plan competitor analysis.

6. It can help to secure talent In order for a business to be successful, attracting talented workers is crucial. A business plan can help to secure this talent by setting out a clear vision for the business. From management to skilled entry level staff, by showing individuals the direction and potential of the business, you can start to build a strong and coherent team.

The disadvantages of a business plan

Business plans can be time-consuming and expensive to produce. On top of this, there is also no guarantee that they will be accurate or help you to achieve the investment you are looking for. With this in mind, below we outline a number of disadvantages when it comes to creating a business plan:

1. It may not be accurate Putting together credible business plans is a highly skilled process. For this reason, many businesses seek the help of experienced business advisors when creating one. However, even with the help of a broad range of expert opinions, there is no guarantee that what is produced will be accurate. Industries and even wider business climates can change very quickly. This means that even taking the time and money to create an in-depth business plan can be risky.

2. It can make you become ‘tunnel-visioned’ In a world where nothing is 100% certain, treating your business plan as an uncompromising manual is a bad idea. The fact is, they are nothing more than a set of forecasts. If followed religiously, these strategy documents can ultimately do more harm than good. This is especially true if you become tunnel-visioned by your business plan and fail to adapt when market forces and changing economic environments demand it.

3. It can waste precious time and money Creating a business plan can take a lot of time and money to produce. It may require the help of third-party experts, such as business advisors, lawyers and accountants, all of which will charge for their services. Additionally, it can also take you and other employees away from the day-to-day tasks involved with launching a new business. This can lead to precious resources being wasted on a task whose cost may exceed its benefits.

The above points show that although business plans represent an essential component for most new businesses, comprehensive plans may not be 100% necessary in all circumstances. Luckily, if you are looking to put one together but are struggling to know where to start, the Markel Law Hub can help. We have a simple, easy-to-follow business plan template for you to download. To learn how you can access the Markel Law Hub, click here .

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How to make a business plan

Table of Contents

How to make a good business plan: step-by-step guide.

A business plan is a strategic roadmap used to navigate the challenging journey of entrepreneurship. It's the foundation upon which you build a successful business.

A well-crafted business plan can help you define your vision, clarify your goals, and identify potential problems before they arise.

But where do you start? How do you create a business plan that sets you up for success?

This article will explore the step-by-step process of creating a comprehensive business plan.

What is a business plan?

A business plan is a formal document that outlines a business's objectives, strategies, and operational procedures. It typically includes the following information about a company:

Products or services

Target market

Competitors

Marketing and sales strategies

Financial plan

Management team

A business plan serves as a roadmap for a company's success and provides a blueprint for its growth and development. It helps entrepreneurs and business owners organize their ideas, evaluate the feasibility, and identify potential challenges and opportunities.

As well as serving as a guide for business owners, a business plan can attract investors and secure funding. It demonstrates the company's understanding of the market, its ability to generate revenue and profits, and its strategy for managing risks and achieving success.

Business plan vs. business model canvas

A business plan may seem similar to a business model canvas, but each document serves a different purpose.

A business model canvas is a high-level overview that helps entrepreneurs and business owners quickly test and iterate their ideas. It is often a one-page document that briefly outlines the following:

Key partnerships

Key activities

Key propositions

Customer relationships

Customer segments

Key resources

Cost structure

Revenue streams

On the other hand, a Business Plan Template provides a more in-depth analysis of a company's strategy and operations. It is typically a lengthy document and requires significant time and effort to develop.

A business model shouldn’t replace a business plan, and vice versa. Business owners should lay the foundations and visually capture the most important information with a Business Model Canvas Template . Because this is a fast and efficient way to communicate a business idea, a business model canvas is a good starting point before developing a more comprehensive business plan.

A business plan can aim to secure funding from investors or lenders, while a business model canvas communicates a business idea to potential customers or partners.

Why is a business plan important?

A business plan is crucial for any entrepreneur or business owner wanting to increase their chances of success.

Here are some of the many benefits of having a thorough business plan.

Helps to define the business goals and objectives

A business plan encourages you to think critically about your goals and objectives. Doing so lets you clearly understand what you want to achieve and how you plan to get there.

A well-defined set of goals, objectives, and key results also provides a sense of direction and purpose, which helps keep business owners focused and motivated.

Guides decision-making

A business plan requires you to consider different scenarios and potential problems that may arise in your business. This awareness allows you to devise strategies to deal with these issues and avoid pitfalls.

With a clear plan, entrepreneurs can make informed decisions aligning with their overall business goals and objectives. This helps reduce the risk of making costly mistakes and ensures they make decisions with long-term success in mind.

Attracts investors and secures funding

Investors and lenders often require a business plan before considering investing in your business. A document that outlines the company's goals, objectives, and financial forecasts can help instill confidence in potential investors and lenders.

A well-written business plan demonstrates that you have thoroughly thought through your business idea and have a solid plan for success.

Identifies potential challenges and risks

A business plan requires entrepreneurs to consider potential challenges and risks that could impact their business. For example:

Is there enough demand for my product or service?

Will I have enough capital to start my business?

Is the market oversaturated with too many competitors?

What will happen if my marketing strategy is ineffective?

By identifying these potential challenges, entrepreneurs can develop strategies to mitigate risks and overcome challenges. This can reduce the likelihood of costly mistakes and ensure the business is well-positioned to take on any challenges.

Provides a basis for measuring success

A business plan serves as a framework for measuring success by providing clear goals and financial projections . Entrepreneurs can regularly refer to the original business plan as a benchmark to measure progress. By comparing the current business position to initial forecasts, business owners can answer questions such as:

Are we where we want to be at this point?

Did we achieve our goals?

If not, why not, and what do we need to do?

After assessing whether the business is meeting its objectives or falling short, business owners can adjust their strategies as needed.

How to make a business plan step by step

The steps below will guide you through the process of creating a business plan and what key components you need to include.

1. Create an executive summary

Start with a brief overview of your entire plan. The executive summary should cover your business plan's main points and key takeaways.

Keep your executive summary concise and clear with the Executive Summary Template . The simple design helps readers understand the crux of your business plan without reading the entire document.

2. Write your company description

Provide a detailed explanation of your company. Include information on what your company does, the mission statement, and your vision for the future.

Provide additional background information on the history of your company, the founders, and any notable achievements or milestones.

3. Conduct a market analysis

Conduct an in-depth analysis of your industry, competitors, and target market. This is best done with a SWOT analysis to identify your strengths, weaknesses, opportunities, and threats. Next, identify your target market's needs, demographics, and behaviors.

Use the Competitive Analysis Template to brainstorm answers to simple questions like:

What does the current market look like?

Who are your competitors?

What are they offering?

What will give you a competitive advantage?

Who is your target market?

What are they looking for and why?

How will your product or service satisfy a need?

These questions should give you valuable insights into the current market and where your business stands.

4. Describe your products and services

Provide detailed information about your products and services. This includes pricing information, product features, and any unique selling points.

Use the Product/Market Fit Template to explain how your products meet the needs of your target market. Describe what sets them apart from the competition.

5. Design a marketing and sales strategy

Outline how you plan to promote and sell your products. Your marketing strategy and sales strategy should include information about your:

Pricing strategy

Advertising and promotional tactics

Sales channels

The Go to Market Strategy Template is a great way to visually map how you plan to launch your product or service in a new or existing market.

6. Determine budget and financial projections

Document detailed information on your business’ finances. Describe the current financial position of the company and how you expect the finances to play out.

Some details to include in this section are:

Startup costs

Revenue projections

Profit and loss statement

Funding you have received or plan to receive

Strategy for raising funds

7. Set the organization and management structure

Define how your company is structured and who will be responsible for each aspect of the business. Use the Business Organizational Chart Template to visually map the company’s teams, roles, and hierarchy.

As well as the organization and management structure, discuss the legal structure of your business. Clarify whether your business is a corporation, partnership, sole proprietorship, or LLC.

8. Make an action plan

At this point in your business plan, you’ve described what you’re aiming for. But how are you going to get there? The Action Plan Template describes the following steps to move your business plan forward. Outline the next steps you plan to take to bring your business plan to fruition.

Types of business plans

Several types of business plans cater to different purposes and stages of a company's lifecycle. Here are some of the most common types of business plans.

Startup business plan

A startup business plan is typically an entrepreneur's first business plan. This document helps entrepreneurs articulate their business idea when starting a new business.

Not sure how to make a business plan for a startup? It’s pretty similar to a regular business plan, except the primary purpose of a startup business plan is to convince investors to provide funding for the business. A startup business plan also outlines the potential target market, product/service offering, marketing plan, and financial projections.

Strategic business plan

A strategic business plan is a long-term plan that outlines a company's overall strategy, objectives, and tactics. This type of strategic plan focuses on the big picture and helps business owners set goals and priorities and measure progress.

The primary purpose of a strategic business plan is to provide direction and guidance to the company's management team and stakeholders. The plan typically covers a period of three to five years.

Operational business plan

An operational business plan is a detailed document that outlines the day-to-day operations of a business. It focuses on the specific activities and processes required to run the business, such as:

Organizational structure

Staffing plan

Production plan

Quality control

Inventory management

Supply chain

The primary purpose of an operational business plan is to ensure that the business runs efficiently and effectively. It helps business owners manage their resources, track their performance, and identify areas for improvement.

Growth-business plan

A growth-business plan is a strategic plan that outlines how a company plans to expand its business. It helps business owners identify new market opportunities and increase revenue and profitability. The primary purpose of a growth-business plan is to provide a roadmap for the company's expansion and growth.

The 3 Horizons of Growth Template is a great tool to identify new areas of growth. This framework categorizes growth opportunities into three categories: Horizon 1 (core business), Horizon 2 (emerging business), and Horizon 3 (potential business).

One-page business plan

A one-page business plan is a condensed version of a full business plan that focuses on the most critical aspects of a business. It’s a great tool for entrepreneurs who want to quickly communicate their business idea to potential investors, partners, or employees.

A one-page business plan typically includes sections such as business concept, value proposition, revenue streams, and cost structure.

Best practices for how to make a good business plan

Here are some additional tips for creating a business plan:

Use a template

A template can help you organize your thoughts and effectively communicate your business ideas and strategies. Starting with a template can also save you time and effort when formatting your plan.

Miro’s extensive library of customizable templates includes all the necessary sections for a comprehensive business plan. With our templates, you can confidently present your business plans to stakeholders and investors.

Be practical

Avoid overestimating revenue projections or underestimating expenses. Your business plan should be grounded in practical realities like your budget, resources, and capabilities.

Be specific

Provide as much detail as possible in your business plan. A specific plan is easier to execute because it provides clear guidance on what needs to be done and how. Without specific details, your plan may be too broad or vague, making it difficult to know where to start or how to measure success.

Be thorough with your research

Conduct thorough research to fully understand the market, your competitors, and your target audience . By conducting thorough research, you can identify potential risks and challenges your business may face and develop strategies to mitigate them.

Get input from others

It can be easy to become overly focused on your vision and ideas, leading to tunnel vision and a lack of objectivity. By seeking input from others, you can identify potential opportunities you may have overlooked.

Review and revise regularly

A business plan is a living document. You should update it regularly to reflect market, industry, and business changes. Set aside time for regular reviews and revisions to ensure your plan remains relevant and effective.

Create a winning business plan to chart your path to success

Starting or growing a business can be challenging, but it doesn't have to be. Whether you're a seasoned entrepreneur or just starting, a well-written business plan can make or break your business’ success.

The purpose of a business plan is more than just to secure funding and attract investors. It also serves as a roadmap for achieving your business goals and realizing your vision. With the right mindset, tools, and strategies, you can develop a visually appealing, persuasive business plan.

Ready to make an effective business plan that works for you? Check out our library of ready-made strategy and planning templates and chart your path to success.

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• Write Your Business Plan | Part 1 Overview Video
• The Basics of Writing a Business Plan
• How to Use Your Business Plan Most Effectively

12 Reasons You Need a Business Plan

• The Main Objectives of a Business Plan
• What to Include and Not Include in a Successful Business Plan
• The Top 4 Types of Business Plans
• A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
• 6 Tips for Making a Winning Business Presentation
• 3 Key Things You Need to Know About Financing Your Business
• 12 Ways to Set Realistic Business Goals and Objectives
• How to Perfectly Pitch Your Business Plan in 10 Minutes
• How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
• How to Fund Your Business Using Banks and Credit Unions
• How to Fund Your Business With an SBA Loan
• How to Fund Your Business With Bonds and Indirect Funding Sources
• How to Fund Your Business With Venture Capital
• How to Fund Your Business With Angel Investors
• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

12 Reasons You Need a Business Plan Writing a business plan gives you a much better chance for success. But it does open you up to some risks.

By Eric Butow • Oct 27, 2023

Opinions expressed by Entrepreneur contributors are their own.

This is part 4 / 12 of Write Your Business Plan: Section 1: The Foundation of a Business Plan series.

The only person who doesn't need a business plan is the one who's not going into business. You don't need a plan to start a hobby or something you do on the side for fun. But anybody beginning or extending a venture that will consume significant resources of money , energy, or time and that is expected to return a profit should take the time to draft some kind of plan.

Who Needs a Business Plan?

The classic business plan writer is an entrepreneur seeking funds to help start a new venture. Many great companies had their starts in the form of a plan that was used to convince investors to put up the capital necessary to get them underway.

However, it's a mistake to think that only startups need business plans. Companies and managers find plans useful at all stages of their existence, whether they're seeking financing or trying to figure out how to invest a surplus.

Established Firms Seeking Help

Many business plans are written by and for companies that are long past the startup stage but also well short of large-corporation status. These middle-stage enterprises may draft plans to help them find funding for growth just as the startups do, although the amounts they seek may be larger and the investors more willing because the company already has a track record. They may feel the need for a written plan to help manage an already rapidly growing business. A business plan may be seen as a valuable tool to convey the mission and prospects of the business to customers, suppliers, or other interested parties.

Just as the initial plan maps how to get from one leg of the journey to the next, an updated plan for additional funding adds another leg of your journey. It's not unlike traveling from the United States to Paris and then deciding to visit London or Barcelona or both along the way. You would then need to add to, or update, your plans. A business plan can, therefore, address the next stage in the life process of a business.

Related: How To Write A Business Plan

Business plans could be considered cheap insurance. Just as many people don't buy fire insurance on their homes and rely on good fortune to protect their investments, many successful business owners do not rely on written business plans but trust their own instincts. However, your business plan is more than insurance. It reflects your ideas , intuitions, instincts, and insights about your business and its future—and provides the cheap insurance of testing them out before you are committed to a course of action. There are so many reasons to create a business plan, and chances are that more than one of the following will apply to your business.

1. A plan helps you set specific objectives for managers.

Good management requires setting specific objectives and then tracking and following up. As your business grows, you want to organize, plan, and communicate your business priorities better to your team and to you. Writing a plan gets everything clear in your head before you talk about it with your team.

2. You can share your strategy, priorities, and plans with your spouse or partner.

People in your personal life intersect with your business life, so shouldn't they know what's supposed to be happening?

3. Use the plan to explain your displacement.

A short definition of displacement is, "Whatever you do is something else you don't do." Your plan will explain why you're doing what you've decided to do in your business.

4. A plan helps you figure out whether or not to rent or buy new space.

Do your growth prospects and plans justify taking on an increased fixed cost of new space?

Related: Do You Need To Write A Business Plan

5. You can explain your strategy for hiring new people.

How will new people help your business grow and prosper? What exactly are they going to do?

6. A plan helps you decide whether or not to bring on new assets.

How many new assets do you need, and will you buy or lease them? Use your business plan to help decide what's going to happen in the long term and how long important purchases, such as computer equipment, will last in your plan.

7. Share your plan with your team.

Explain the business objectives in your plan with your leadership team, employees, and new hires. What's more, make selected portions of your plan part of your new employee training.

8. Share parts of your plan with new allies to bring them aboard.

Use your plan to set targets for new alliances with complementary businesses and also disclose selected portions of your plan with those businesses as you negotiate an alliance.

9. Use your plan when you deal with professionals.

Share selected parts of your plan with your attorneys and accountants, as well as consultants if necessary.

10. Have all the information in your plan when you're ready to sell.

Sell your business when it's time to put it on the market so you can help buyers understand what you have, what it's worth, and why they want it.

Related: How To Build A Business Plan

11. A plan helps you set the valuation of the business.

Valuation means how much your business is worth, and it applies to formal transactions related to divorce, inheritance, estate planning, and tax issues. Usually, that takes a business plan as well as a professional with experience. The plan tells the valuation expert what your business is doing, when it's doing (or will do) certain things, why those things are being done, how much that work will cost, and the benefits that work will produce.

12. You can use information in the plan when you need cash.

Seek investment for a business no matter what stage of growth the business finds itself in. Investors need to see a business plan before they decide whether or not to invest. They'll expect the plan to cover all the main points.

Bonus: The Benefits for You

If you and/or someone on your team are still skeptical about the benefits of a business plan and how it will benefit you personally, consider some advantages that can help in your day-to-day management:

Your educated guesses will be better. Use your plan to refine your educated guesses about things like potential markets, sales drivers, lead processing, and business processes. Priorities will make more sense. Aside from the strategy, there are also priorities for other factors of your business including growth, management, and financial health. Use your plan to set a foundation for these, then you can revise them as the business evolves.

You'll understand interdependencies. Use a plan to keep track of what needs to happen and in what order. For example, if you have to time a product release to dovetail with your marketing efforts, your business plan can be invaluable in keeping you organized and on track.

You'll be better at delegating . The business plan must make clear who is responsible for what. Every important task should have one person in charge.

Managing team members and tracking results will be easy. The plan is a great format for putting responsibilities and expectations in writing. Then during team member reviews, you can look to your plan to spot the differences between expectations and results so that you can make course corrections.

You can better plan and manage cash flow. A cash flow plan within your overall business plan helps you and your leadership team make better-educated guesses about sales, costs, expenses, assets you need to buy, and debts you have to pay.

Related: How To Craft A Business Plan That Will Turn Investors' Heads

Business Planning Risks

There are risks associated with writing a business plan. That's right: While one of the main purposes of a business plan is to help you avoid risk, the act of creating one does create a few risks as well. These risks include:

The possible disclosure of confidential material. Although most of the people who see your plan will respect its confidentiality, a few may (either deliberately or by mistake) disclose proprietary information. For this reason, you may want to have a nondisclosure agreement, or NDA, signed before sending it to others.

Leading yourself astray. You may believe too strongly in the many forecasts and projects in your business plan.

Related: The Basics Of Writing A Business Plan

Ruining your reputation . . . or worse. If you purposely fill the plan with overly optimistic prognostication, exaggeration, or even falsehoods, you will do yourself a disservice. Some plans prepared for the purpose of seeking funds may run afoul of securities laws if they appear to be serving as prospectuses unblessed by the regulators.

Spending too much effort planning. You then may not have enough energy or time to actually run your business. Some call it "analysis paralysis." It's a syndrome that occurs when you spend so much time planning that you never do anything. For a lot of business people, this is a nonissue—they detest planning so much that there's no chance at all they'd forgo actually doing business and merely plan it.

Business planning can take on a life of its own. It's possible to spend so much time planning a startup that you miss your window of opportunity or to schedule such frequent updates of a plan for an established business that it becomes difficult to administer its other details. Big corporations have large staffs, which can be devoted to year-round planning. As a small business owner, you have to be more selective.

Your planning may be approaching the paralysis stage if you find yourself soothing your nerves about starting a business by delaying the startup date so you can plan more. If you notice yourself putting off crucial meetings so you can dig up more information for a plan update, suspect that planning has become overly important.

Related: What To Include And Not Include In A Business Plan

Diluting the effectiveness of your plan . If you put too much detail into your plan, you run the risk of overburdening anybody who reads it with irrelevant, obscuring details. A plan isn't supposed to be a potboiler, but it should tell a story—the story of your business.

Therefore, it should be as easy as possible to read. That means keeping technical jargon under control and making it readable in one sitting.

Explain any terms that may be unfamiliar to a reader who's not an expert on your industry. And never make the mistake of trying to overawe a reader with your expertise. There's a good chance someone reading your plan will know more than you do. If you come across as an overblown pretender, you can bet your plan will get short shrift.

It's easy to believe that a longer, more detailed plan is always better than a short, concise one. But financiers and others to whom you may send your plan are busy people. They do not have time to plow through an inches-thick plan and may be put off by its imposing appearance. Better to keep it to a couple of dozen pages and stick to the truly important material.

Expediting your plan . While some insist on endless planning, others try to speed up the process. In an effort to get a plan written quickly to show a potential investor, you may find yourself cutting corners or leaving out vital information. You don't want to take forever to prepare a business plan but using some of the business plan software programs can make it so easy that you find yourself letting the programs do more of the work. Remember, the tools are there to guide you and not the other way around. Give yourself enough time to make sure that:

• Each section says what you want it to say.
• All of your numbers add up and make sense.
• You have answers to anything readers could possibly ask you.

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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The Most Common Business Plan Pitfalls and How to Avoid Them

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Every company benefits from an updated business plan. While it seems necessary for start-ups, it applies to established firms, too. An efficiently written business plan keeps the whole business on track in the process of execution of the company’s strategy and reaching its business goals. Business plan mistakes can result in anything ranging from small oversights to fatal errors for your business. It is even more important for the business who are at the funds raising stage, so the information they provide is accurate and none of your ideas are misleading and are in tune with the current market. To help you avoid your business plan from being discarded, here are some of the critical business plan mistakes to be careful with:

• Long and bulky Executive Summary The readers of business plan such as investors, bank institutions and key vendors start considering your business idea from reading the executive summary. Executive summary is a highlight of the most important items of your business plan in a concise but informative way. It should succinctly describe your compelling story on how a highly skilled team will deliver products or services to precisely defined target markets based on a consistent strategy. Besides, it should state the company’s value proposition on how their products or services will change the life of its customers for the better in a profitable way. In fact, many executive summaries are boring and state some business idea whose execution remains vague. Often, it is presented as just cut and paste of some sections from the introduction and some other parts of business plan. Therefore, there are high chances of the busy investor to move on to the next proposal, if executive summary does not provide a clear, convincing, and persuasive overview of the business.
• Attaching your value proposition to dated technology or dwindling markets When formulating in your business plan the opportunity you see for a product or service, you need to question it and can’t just assume that the idea has automatic demand in the real world. A professionally written business plan will assure you are setting up your business for success. This implies that you must develop a value proposition of your product or service that will change an emerging or existing market. Those markets that are shrinking or are being replaced by new industries will make it incredibly challenging for you to get funding. For instance, what would your reaction be if someone developed waterproof ink for typewriter ribbons? You wouldn’t necessarily be amazed, because the number of people looking to buy something like that is miniscule.
• Not knowing the target audience and segments A product or service that is everything to everyone does not exist. If that were so, we would all be using the same phone. In fact, your product or service is specific and advantageous to an ideal type of customer. Without defining your target market, you cannot reason how you will handle the fierce competition. There are competitors who are providing the same product and service. Investors trust their funds to companies that have completed and gained a complete knowledge of primary and secondary market. You must define your target market and outline how you will target this audience.
• Having unrealistic and aggressive growth projections Having read the executive summary, many investors jump straight to the financial section of the business plan. It is important that the assumptions and projections in this section to be realistic. Plans that show sales forecast, operating margin and revenues that are poorly reasoned, internally inconsistent or simply unrealistic significantly damage the credibility of the entire business plan. In opposite, sober, well-supported financial assumptions and projections communicate operational maturity and credibility. Benchmarking is an especially useful tool to use in your financial analysis. By comparing and basing your projections on the financial performance of public companies within your marketplace, you can prove that your assumptions and projections are achievable. Planium Pro makes your life easier in that regard. Finance section of the Planium Pro’s software provides an easy and quick benchmarking tool for a variety of industries so you can efficiently measure your projections and key ratios against your market averages.

• Acknowledging your competitors, but not researching them Many new businesses are too much inward-focused. Being confident about your product or service is certainly a good attitude. But there is risk that this could twist your idea of how it correlates with products and services of competitors who have been in the market for some time. Besides, quite often entrepreneurs also miss or underestimate the possibility of new entrants who could increase competitive pressure. Our recommendation is to learn as much as you can about the people you’re going up against and perform Competitor Analysis, based on their pricing, quality, service and distribution channels. Knowing this information helps you prepare your own strategy to differentiate your business from theirs.

Next Steps • Keep these critical mistakes in mind when writing your business plan. • If you have already started writing your plan, use Planium Pro software to ease your preparation and streamline the process. Join our Planium Pro to see all the benefits yourself. Read More We would be interested to receive comments from small-business owners on what mistakes you have made in business plan writing and how you fixed them.

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14 Reasons Why You Need a Business Plan

10 min. read

Updated April 19, 2024

There’s no question that starting and running a business is hard work. But it’s also incredibly rewarding. And, one of the most important things you can do to increase your chances of success is to have a business plan.

A business plan is a foundational document that is essential for any company, no matter the size or age. From attracting potential investors to keeping your business on track—a business plan helps you achieve important milestones and grow in the right direction.

A business plan isn’t just a document you put together once when starting your business. It’s a living, breathing guide for existing businesses – one that business owners should revisit and update regularly.

Unfortunately, writing a business plan is often a daunting task for potential entrepreneurs. So, do you really need a business plan? Is it really worth the investment of time and resources? Can’t you just wing it and skip the whole planning process?

Good questions. Here’s every reason why you need a business plan.

• 1. Business planning is proven to help you grow 30 percent faster

Writing a business plan isn’t about producing a document that accurately predicts the future of your company. The  process  of writing your plan is what’s important. Writing your plan and reviewing it regularly gives you a better window into what you need to do to achieve your goals and succeed. 

You don’t have to just take our word for it. Studies have  proven that companies that plan  and review their results regularly grow 30 percent faster. Beyond faster growth, research also shows that companies that plan actually perform better. They’re less likely to become one of those woeful failure statistics, or experience  cash flow crises  that threaten to close them down. 

• 2. Planning is a necessary part of the fundraising process

One of the top reasons to have a business plan is to make it easier to raise money for your business. Without a business plan, it’s difficult to know how much money you need to raise, how you will spend the money once you raise it, and what your budget should be.

Investors want to know that you have a solid plan in place – that your business is headed in the right direction and that there is long-term potential in your venture. 

A business plan shows that your business is serious and that there are clearly defined steps on how it aims to become successful. It also demonstrates that you have the necessary competence to make that vision a reality. 

Investors, partners, and creditors will want to see detailed financial forecasts for your business that shows how you plan to grow and how you plan on spending their money. 

• 3. Having a business plan minimizes your risk

When you’re just starting out, there’s so much you don’t know—about your customers, your competition, and even about operations. 

As a business owner, you signed up for some of that uncertainty when you started your business, but there’s a lot you can  do to reduce your risk . Creating and reviewing your business plan regularly is a great way to uncover your weak spots—the flaws, gaps, and assumptions you’ve made—and develop contingency plans. 

Your business plan will also help you define budgets and revenue goals. And, if you’re not meeting your goals, you can quickly adjust spending plans and create more realistic budgets to keep your business healthy.

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• 4. Crafts a roadmap to achieve important milestones

A business plan is like a roadmap for your business. It helps you set, track and reach business milestones. 

For your plan to function in this way, your business plan should first outline your company’s short- and long-term goals. You can then fill in the specific steps necessary to reach those goals. This ensures that you measure your progress (or lack thereof) and make necessary adjustments along the way to stay on track while avoiding costly detours.

In fact, one of the top reasons why new businesses fail is due to bad business planning. Combine this with inflexibility and you have a recipe for disaster.

And planning is not just for startups. Established businesses benefit greatly from revisiting their business plan. It keeps them on track, even when the global market rapidly shifts as we’ve seen in recent years.

• 5. A plan helps you figure out if your idea can become a business

To turn your idea into reality, you need to accurately assess the feasibility of your business idea.

You need to verify:

• If there is a market for your product or service
• Who your target audience is
• How you will gain an edge over the current competition
• If your business can run profitably

A business plan forces you to take a step back and look at your business objectively, which makes it far easier to make tough decisions down the road. Additionally, a business plan helps you to identify risks and opportunities early on, providing you with the necessary time to come up with strategies to address them properly.

Finally, a business plan helps you work through the nuts and bolts of how your business will work financially and if it can become sustainable over time.

6. You’ll make big spending decisions with confidence

As your business grows, you’ll have to figure out when to hire new employees, when to expand to a new location, or whether you can afford a major purchase. 

These are always major spending decisions, and if you’re regularly reviewing the forecasts you mapped out in your business plan, you’re going to have better information to use to make your decisions.

7. You’re more likely to catch critical cash flow challenges early

The other side of those major spending decisions is understanding and monitoring your business’s cash flow. Your  cash flow statement  is one of the three key financial statements you’ll put together for your business plan. (The other two are your  balance sheet  and your  income statement  (P&L). 

Reviewing your cash flow statement regularly as part of your regular business plan review will help you see potential cash flow challenges earlier so you can take action to avoid a cash crisis where you can’t pay your bills. 

• 8. Position your brand against the competition

Competitors are one of the factors that you need to take into account when starting a business. Luckily, competitive research is an integral part of writing a business plan. It encourages you to ask questions like:

• What is your competition doing well? What are they doing poorly?
• What can you do to set yourself apart?
• What can you learn from them?
• How can you make your business stand out?
• What key business areas can you outcompete?
• How can you identify your target market?

Finding answers to these questions helps you solidify a strategic market position and identify ways to differentiate yourself. It also proves to potential investors that you’ve done your homework and understand how to compete. 

• 9. Determines financial needs and revenue models

A vital part of starting a business is understanding what your expenses will be and how you will generate revenue to cover those expenses. Creating a business plan helps you do just that while also defining ongoing financial needs to keep in mind. 

Without a business model, it’s difficult to know whether your business idea will generate revenue. By detailing how you plan to make money, you can effectively assess the viability and scalability of your business. 

Understanding this early on can help you avoid unnecessary risks and start with the confidence that your business is set up to succeed.

• 10. Helps you think through your marketing strategy

A business plan is a great way to document your marketing plan. This will ensure that all of your marketing activities are aligned with your overall goals. After all, a business can’t grow without customers and you’ll need a strategy for acquiring those customers. 

Your business plan should include information about your target market, your marketing strategy, and your marketing budget. Detail things like how you plan to attract and retain customers, acquire new leads, how the digital marketing funnel will work, etc. 

Having a documented marketing plan will help you to automate business operations, stay on track and ensure that you’re making the most of your marketing dollars.

• 11. Clarifies your vision and ensures everyone is on the same page

In order to create a successful business, you need a clear vision and a plan for how you’re going to achieve it. This is all detailed with your mission statement, which defines the purpose of your business, and your personnel plan, which outlines the roles and responsibilities of current and future employees. Together, they establish the long-term vision you have in mind and who will need to be involved to get there. 

Additionally, your business plan is a great tool for getting your team in sync. Through consistent plan reviews, you can easily get everyone in your company on the same page and direct your workforce toward tasks that truly move the needle.

• 12. Future-proof your business

A business plan helps you to evaluate your current situation and make realistic projections for the future.

This is an essential step in growing your business, and it’s one that’s often overlooked. When you have a business plan in place, it’s easier to identify opportunities and make informed decisions based on data.

Therefore, it requires you to outline goals, strategies, and tactics to help the organization stay focused on what’s important.

By regularly revisiting your business plan, especially when the global market changes, you’ll be better equipped to handle whatever challenges come your way, and pivot faster.

You’ll also be in a better position to seize opportunities as they arise.

Further Reading: 5 fundamental principles of business planning

• 13. Tracks your progress and measures success

An often overlooked purpose of a business plan is as a tool to define success metrics. A key part of writing your plan involves pulling together a viable financial plan. This includes financial statements such as your profit and loss, cash flow, balance sheet, and sales forecast.

By housing these financial metrics within your business plan, you suddenly have an easy way to relate your strategy to actual performance. You can track progress, measure results, and follow up on how the company is progressing. Without a plan, it’s almost impossible to gauge whether you’re on track or not.  

Additionally, by evaluating your successes and failures, you learn what works and what doesn’t and you can make necessary changes to your plan. In short, having a business plan gives you a framework for measuring your success. It also helps with building up a “lessons learned” knowledge database to avoid costly mistakes in the future.

• 14. Your business plan is an asset if you ever want to sell

Down the road, you might decide that you want to sell your business or position yourself for acquisition. Having a solid business plan is going to help you make the case for a higher valuation. Your business is likely to be worth more to a buyer if it’s easy for them to understand your business model, your target market, and your overall potential to grow and scale. 

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• Writing your business plan

By taking the time to create a business plan, you ensure that your business is heading in the right direction and that you have a roadmap to get there. We hope that this post has shown you just how important and valuable a business plan can be. While it may still seem daunting, the benefits far outweigh the time investment and learning curve for writing one. 

Luckily, you can write a plan in as little as 30 minutes. And there are plenty of excellent planning tools and business plan templates out there if you’re looking for more step-by-step guidance. Whatever it takes, write your plan and you’ll quickly see how useful it can be.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

• 6. You’ll make big spending decisions with confidence
• 7. You’re more likely to catch critical cash flow challenges early

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Do you REALLY need a business plan?

The top three questions that I get asked most frequently as a professional business plan writer will probably not surprise you:

• What is the purpose of a business plan – why is it really required?
• How is it going to benefit my business if I write a business plan?
• Is a business plan really that important – how can I actually use it?

Keep reading to get my take on what the most essential advantages of preparing a business plan are—and why you may (not) need to prepare one.

The importance, purpose and benefit of a business plan is in that it enables you to validate a business idea, secure funding, set strategic goals – and then take organized action on those goals by making decisions, managing resources, risk and change, while effectively communicating with stakeholders.

Let’s take a closer look at how each of the important business planning benefits can catapult your business forward:

1. Validate Your Business Idea

The process of writing your business plan will force you to ask the difficult questions about the major components of your business, including:

• External: industry, target market of prospective customers, competitive landscape
• Internal: business model, unique selling proposition, operations, marketing, finance

Business planning connects the dots to draw a big picture of the entire business.

And imagine how much time and money you would save if working through a business plan revealed that your business idea is untenable. You would be surprised how often that happens – an idea that once sounded so very promising may easily fall apart after you actually write down all the facts, details and numbers.

While you may be tempted to jump directly into start-up mode, writing a business plan is an essential first step to check the feasibility of a business before investing too much time and money into it. Business plans help to confirm that the idea you are so passionate and convinced about is solid from business point of view.

Take the time to do the necessary research and work through a proper business plan. The more you know, the higher the likelihood that your business will succeed.

2. Set and Track Goals

Successful businesses are dynamic and continuously evolve. And so are good business plans that allow you to:

• Priorities: Regularly set goals, targets (e.g., sales revenues reached), milestones (e.g. number of employees hired), performance indicators and metrics for short, mid and long term
• Accountability: Track your progress toward goals and benchmarks
• Course-correction: make changes to your business as you learn more about your market and what works and what does not
• Mission: Refer to a clear set of values to help steer your business through any times of trouble

Essentially, business plan is a blueprint and an important strategic tool that keeps you focused, motivated and accountable to keep your business on track. When used properly and consulted regularly, it can help you measure and manage what you are working so hard to create – your long-term vision.

As humans, we work better when we have clear goals we can work towards. The everyday business hustle makes it challenging to keep an eye on the strategic priorities. The business planning process serves as a useful reminder.

3. Take Action

A business plan is also a plan of action . At its core, your plan identifies where you are now, where you want your business to go, and how you will get there.

Planning out exactly how you are going to turn your vision into a successful business is perhaps the most important step between an idea and reality. Success comes not only from having a vision but working towards that vision in a systematic and organized way.

A good business plan clearly outlines specific steps necessary to turn the business objectives into reality. Think of it as a roadmap to success. The strategy and tactics need to be in alignment to make sure that your day-to-day activities lead to the achievement of your business goals.

4. Manage Resources

A business plan also provides insight on how resources required for achieving your business goals will be structured and allocated according to their strategic priority. For example:

Large Spending Decisions

• Assets: When and in what amount will the business commit resources to buy/lease new assets, such as computers or vehicles.
• Human Resources: Objectives for hiring new employees, including not only their pay but how they will help the business grow and flourish.
• Business Space: Information on costs of renting/buying space for offices, retail, manufacturing or other operations, for example when expanding to a new location.

Cash Flow It is essential that a business carefully plans and manages cash flows to ensure that there are optimal levels of cash in the bank at all times and avoid situations where the business could run out of cash and could not afford to pay its bills.

Revenues v. Expenses In addition, your business plan will compare your revenue forecasts to the budgeted costs to make sure that your financials are healthy and the business is set up for success.

5. Make Decisions

Whether you are starting a small business or expanding an existing one, a business plan is an important tool to help guide your decisions:

Sound decisions Gathering information for the business plan boosts your knowledge across many important areas of the business:

• Industry, market, customers and competitors
• Financial projections (e.g., revenue, expenses, assets, cash flow)
• Operations, technology and logistics
• Human resources (management and staff)
• Creating value for your customer through products and services

Decision-making skills The business planning process involves thorough research and critical thinking about many intertwined and complex business issues. As a result, it solidifies the decision-making skills of the business owner and builds a solid foundation for strategic planning , prioritization and sound decision making in your business. The more you understand, the better your decisions will be.

Planning Thorough planning allows you to determine the answer to some of the most critical business decisions ahead of time , prepare for anticipate problems before they arise, and ensure that any tactical solutions are in line with the overall strategy and goals.

If you do not take time to plan, you risk becoming overwhelmed by countless options and conflicting directions because you are not unclear about the mission , vision and strategy for your business.

6. Manage Risk

Some level of uncertainty is inherent in every business, but there is a lot you can do to reduce and manage the risk, starting with a business plan to uncover your weak spots.

You will need to take a realistic and pragmatic look at the hard facts and identify:

• Major risks , challenges and obstacles that you can expect on the way – so you can prepare to deal with them.
• Weaknesses in your business idea, business model and strategy – so you can fix them.
• Critical mistakes before they arise – so you can avoid them.

Essentially, the business plan is your safety net . Naturally, business plan cannot entirely eliminate risk, but it can significantly reduce it and prepare you for any challenges you may encounter.

7. Communicate Internally

Attract talent For a business to succeed, attracting talented workers and partners is of vital importance.

A business plan can be used as a communication tool to attract the right talent at all levels, from skilled staff to executive management, to work for your business by explaining the direction and growth potential of the business in a presentable format.

Align performance Sharing your business plan with all team members helps to ensure that everyone is on the same page when it comes to the long-term vision and strategy.

You need their buy-in from the beginning, because aligning your team with your priorities will increase the efficiency of your business as everyone is working towards a common goal .

If everyone on your team understands that their piece of work matters and how it fits into the big picture, they are more invested in achieving the objectives of the business.

It also makes it easier to track and communicate on your progress.

Share and explain business objectives with your management team, employees and new hires. Make selected portions of your business plan part of your new employee training.

8. Communicate Externally

Alliances If you are interested in partnerships or joint ventures, you may share selected sections of your plan with the potential business partners in order to develop new alliances.

Suppliers A business plan can play a part in attracting reliable suppliers and getting approved for business credit from suppliers. Suppliers who feel confident that your business will succeed (e.g., sales projections) will be much more likely to extend credit.

In addition, suppliers may want to ensure their products are being represented in the right way .

Professional Services Having a business plan in place allows you to easily share relevant sections with those you rely on to support the organization, including attorneys, accountants, and other professional consultants as needed, to make sure that everyone is on the same page.

Advisors Share the plan with experts and professionals who are in a position to give you valuable advice.

Landlord Some landlords and property managers require businesses to submit a business plan to be considered for a lease to prove that your business will have sufficient cash flows to pay the rent.

Customers The business plan may also function as a prospectus for potential customers, especially when it comes to large corporate accounts and exclusive customer relationships.

9. Secure Funding

If you intend to seek outside financing for your business, you are likely going to need a business plan.

Whether you are seeking debt financing (e.g. loan or credit line) from a lender (e.g., bank or financial institution) or equity capital financing from investors (e.g., venture or angel capital), a business plan can make the difference between whether or not – and how much – someone decides to invest.

Investors and financiers are always looking at the risk of default and the earning potential based on facts and figures. Understandably, anyone who is interested in supporting your business will want to check that you know what you are doing, that their money is in good hands, and that the venture is viable in the long run.

Business plans tend to be the most effective ways of proving that. A presentation may pique their interest , but they will most probably request a well-written document they can study in detail before they will be prepared to make any financial commitment.

That is why a business plan can often be the single most important document you can present to potential investors/financiers that will provide the structure and confidence that they need to make decisions about funding and supporting your company.

Be prepared to have your business plan scrutinized . Investors and financiers will conduct extensive checks and analyses to be certain that what is written in your business plan faithful representation of the truth.

10. Grow and Change

It is a very common misconception that a business plan is a static document that a new business prepares once in the start-up phase and then happily forgets about.

But businesses are not static. And neither are business plans. The business plan for any business will change over time as the company evolves and expands .

In the growth phase, an updated business plan is particularly useful for:

Raising additional capital for expansion

• Seeking financing for new assets , such as equipment or property
• Securing financing to support steady cash flows (e.g., seasonality, market downturns, timing of sale/purchase invoices)
• Forecasting to allocate resources according to strategic priority and operational needs
• Valuation (e.g., mergers & acquisitions, tax issues, transactions related to divorce, inheritance, estate planning)

Keeping the business plan updated gives established businesses better chance of getting the money they need to grow or even keep operating.

Business plan is also an excellent tool for planning an exit as it would include the strategy and timelines for a transfer to new ownership or dissolution of the company.

Also, if you ever make the decision to sell your business or position yourself for a merger or an acquisition , a strong business plan in hand is going to help you to maximize the business valuation.

Valuation is the process of establishing the worth of a business by a valuation expert who will draw on professional experience as well as a business plan that will outline what you have, what it’s worth now and how much will it likely produce in the future.

Your business is likely to be worth more to a buyer if they clearly understand your business model, your market, your assets and your overall potential to grow and scale .

Related Questions

Business plan purpose: what is the purpose of a business plan.

The purpose of a business plan is to articulate a strategy for starting a new business or growing an existing one by identifying where the business is going and how it will get there to test the viability of a business idea and maximize the chances of securing funding and achieving business goals and success.

Business Plan Benefits: What are the benefits of a business plan?

A business plan benefits businesses by serving as a strategic tool outlining the steps and resources required to achieve goals and make business ideas succeed, as well as a communication tool allowing businesses to articulate their strategy to stakeholders that support the business.

Business Plan Importance: Why is business plan important?

The importance of a business plan lies in it being a roadmap that guides the decisions of a business on the road to success, providing clarity on all aspects of its operations. This blueprint outlines the goals of the business and what exactly is needed to achieve them through effective management.

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18 Advantages and Disadvantages of Strategic Planning

Strategic planning is a process that involves defining an organization’s goals, developing strategies to achieve those goals, and allocating resources to implement those strategies. 

It is a comprehensive and systematic approach that helps organizations achieve competitive advantage and adapt to changing environments.

• Redaction Team
• September 28, 2023
• Business Planning , Entrepreneurship

Advantages of Strategic Planning

• Clear Direction : Strategic planning provides a clear sense of direction for an organization, helping leaders and employees understand where the organization is headed and what it aims to achieve.
• Alignment : It aligns the efforts of employees and departments toward common goals, fostering a shared vision and purpose within the organization.
• Prioritization : Strategic planning helps organizations prioritize initiatives and allocate resources effectively to focus on high-impact activities.
• Adaptability : While it sets long-term objectives, strategic plans are often flexible and adaptable, allowing organizations to adjust to changing circumstances and seize opportunities.
• Resource Management : It assists in the efficient allocation of resources, including finances, time, and personnel, to support the organization's strategic goals.
• Performance Measurement : Strategic plans often include key performance indicators (KPIs) that enable organizations to track progress and assess the success of their strategies.
• Enhanced Decision-Making : Having a strategic plan in place can guide decision-making processes and reduce uncertainty by providing a framework for evaluating options.
• Communication : It facilitates effective communication both internally and externally, ensuring that stakeholders, employees, and partners are aware of the organization's objectives.

Disadvantages of Strategic Planning

• Time-Consuming : The strategic planning process can be time-consuming, requiring significant input from leaders and employees, which can divert resources from day-to-day operations.
• Costly : Developing and implementing a strategic plan can be expensive, especially when consultants or specialized software are involved.
• Rigidity : Overly rigid strategic plans can hinder an organization's ability to respond quickly to unexpected challenges or opportunities.
• Resistance to Change : Employees may resist changes that are part of the strategic plan, leading to internal conflicts and morale issues.
• Complexity : Strategic planning can become overly complex, making it difficult for employees at all levels of the organization to understand and execute.
• Uncertainty : The future is inherently uncertain, and strategic plans may not always account for unforeseen events or market shifts.
• Limited Focus : In some cases, strategic planning may lead to a narrow focus on achieving specific goals, potentially overlooking broader organizational or societal responsibilities.
• Implementation Challenges : Developing a strategic plan is only the first step; ensuring successful implementation can be challenging, and many strategies fail due to poor execution.
• Lack of Accountability : Without clear accountability and monitoring mechanisms, strategic plans may not be effectively executed, leading to unmet goals.
• Overemphasis on Process : Some organizations become overly focused on the process of strategic planning rather than the outcomes, leading to bureaucratic and time-consuming procedures.

One of the main advantages of strategic planning is that it helps organizations set clear goals and objectives. By having a well-defined strategic plan, organizations can align their resources and efforts towards a common purpose. This clarity of purpose allows employees to understand their roles and responsibilities, which leads to increased motivation and productivity.

Strategic planning also helps organizations identify and leverage their strengths. By conducting a thorough analysis of the internal environment, organizations can identify their core competencies and unique capabilities. This information can then be used to develop strategies that capitalize on these strengths and give the organization a competitive advantage.

Another advantage of strategic planning is that it helps organizations anticipate and adapt to changes in the external environment. By conducting a thorough analysis of the market, industry trends, and competition, organizations can identify potential threats and opportunities. This early identification allows organizations to proactively respond to changes and stay ahead of the competition.

Strategic planning also provides a framework for resource allocation. By setting priorities and making informed decisions about resource allocation, organizations can use their limited resources effectively. This ensures that resources are allocated to the most important and strategic initiatives, maximizing the organization’s impact and return on investment.

In addition, strategic planning helps organizations align their internal processes and functions. By involving different stakeholders and departments in the planning process, organizations can create a shared understanding and commitment to the strategic goals. This alignment improves coordination and collaboration, leading to increased efficiency and effectiveness.

Furthermore, strategic planning provides a basis for evaluating performance and progress. By setting clear goals and key performance indicators, organizations can track their progress and make necessary adjustments along the way. This monitoring and evaluation process allows organizations to learn from their experiences and continuously improve their performance.

Despite its many advantages, strategic planning also has some drawbacks that organizations should be aware of. One of the main disadvantages is the complexity of the process. Strategic planning requires a significant amount of time, effort, and expertise. It involves analyzing large amounts of data, conducting market research, and engaging stakeholders. This complexity can make the planning process challenging and resource-intensive for organizations.

Another disadvantage of strategic planning is the resistance to change it may encounter. Implementing a strategic plan often involves making significant changes to the organization’s structure, processes, and culture. This can create resistance among employees who may be reluctant to change and may fear the unknown. Overcoming this resistance requires effective change management strategies and strong leadership.

Moreover, strategic planning may not always guarantee success. While a good strategic plan provides a roadmap for the organization’s future, its implementation is not always straightforward. External factors, such as changes in the market or unexpected competition, can affect the business and its ability to achieve its strategic goals. Internal factors, such as lack of resources or poor execution, can also hinder the successful implementation of the plan.

Lastly, strategic planning can sometimes overlook the importance of human resources. While strategic plans focus on organizational strategies and objectives, they may not pay enough attention to the people who will execute those strategies. It is essential for organizations to consider the capabilities, skills, and motivation of their employees when developing and implementing strategic plans.

Conclusion of Advantages and Disadvantages of Strategic Management Planning

In conclusion, strategic planning has both advantages and disadvantages for organizations. It helps set clear goals, leverage strengths, adapt to changes, allocate resources effectively, and align internal processes. However, it is a complex process that requires time, effort, and expertise. It may face resistance to change and does not guarantee success. Therefore, organizations should carefully consider these factors when deciding to engage in strategic planning.

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Advantages of a Business Plan: Definition and What It Entails

• by Folakemi Adegbaju
• August 15, 2023
• No comments
• 6 minute read

Table of Contents Hide

#1. planning further develops asset use, #2. plans give inspiration and responsibility, #3. to position your brand, #4. planning gives a manual for activity, #5. to assess the feasibility of your business, #6. to force you to research and really know your market, #7. provides structure, #8. support for funding, #9. increased clarity, #10. helps to secure talent, #1. a business plan can hamper you from looking forward, #2. analyzing performance can become time-consuming, #4. constant change makes a business plan outdated as soon as it’s written, #5. it prevents the freedom you once possessed., final thoughts, what are advantages of planning, what is the importance of a business plan, what is the disadvantages of a business plan.

A business plan is an important tool to guide you if you want to become a successful business owner. A great business starts with a good business plan. Basically, the better your business plan, the more successful your business will be. It also provides insight into the steps you should take. The success of your business depends on how effective your business plan is. But then you might be worried and confused, asking yourself questions like, “What are the advantages of writing a business plan?” What are the disadvantages of a business plan? Getting answers to these questions will help you develop your business and make it grow.

This is a guide to the advantages and disadvantages of a business plan and everything you need to know.

Let’s kick off.

What Are the Advantages of a Business Plan?

Every business begins with a business plan, since beginning a business without one is like going out on a chilly winter night without a coat. The following are the advantages of writing a business plan:

Assets are always scarce in organizations, and management must guarantee that they will be properly utilized. Planning aids administrators in determining where assets are most commonly required so that they can be assigned where they will provide the most benefit.

People are not motivated when they lack defined aims and have no notion of what is expected of them in general. Planning reduces susceptibility and demonstrates what everyone is expected to accomplish. Individuals feel compelled to pursue a goal that they are familiar with.

Defining your company’s position within the market is one of the advantages of writing a business plan. Such a definition enables you to explain the company and its brand to consumers, investors, and partners in a concise manner. You can best identify how to position your brand using the industry, consumer, and competitor knowledge you acquire during the business planning phase.

 Plans can help organize everyone’s activities in order to achieve the desired outcomes. Activities that are composed of and centered around certain outcomes are usually more effective.

What is the significance of this option? The business plan procedure includes analyzing your target market as well as the competitive landscape, and it also serves as a feasibility analysis for your venture’s success. In some situations, your planning will put the business on hold. It could also be to move forward with a different project that has a better probability of succeeding.

What are some of the significant developments in your field? What are the most serious threats to your business? Is the market expanding or contracting? What is the size of your product/target service’s market? Creating a business plan will assist you in gaining a more comprehensive, in-depth, and nuanced grasp of your market. It will also enable you to use this information to make decisions that will help your business thrive.

A business plan gives your business a structure and defines your management goals. It becomes a go-to resource for keeping the business going with sales goals and operational milestones. It can help you measure and manage your primary areas of attention if you use it correctly and on a frequent basis.

You need a business plan that answers questions about profitability and income generation if you’re aiming for loans from a bank or capital from investors. One of the advantages of writing a business plan is getting funding easily and without stress.

A business plan helps you make decisions about important aspects of your business, including capital investments, leasing, and resourcing. A strong business plan helps you determine the most important business priorities and goals to concentrate on.

Attracting competent employees and partners is important to a company’s success. A business plan’s goal is to assist in attracting the right talent at the right moment. Employees want to know what the business vision is, how it plans to achieve its objectives, and how they may help in their individual jobs.

What Are the Disadvantages of a Business Plan?

In the current chaotic environment, planning more than a few months ahead of time may appear pointless. In most cases, progress is rarely achieved through random movement.  Planning aids development in every situation, even when you are confronted with fragility and a constantly changing atmosphere. The biggest disadvantage of a business plan is that it takes time and money to create, and small firms often lack the resources and experience needed to create a solid business plan, which can cause the business to suffer more than benefit from it.

And we’ve got good news for you! We have a team here at BusinessYield Consult to provide you with the necessary information you’d need to start out.

Meanwhile, here are some disadvantages you need to consider in writing a business plan:

 It means that you may be relying too much on your plan without taking into account other external elements such as market circumstances, trends, and so on. Such reliance can force you to make bad decisions and miss out on potentially lucrative possibilities simply because they weren’t part of the plan.

For example, if you want to start a car detailing business and you feel there might be a disruption or crisis, in the long run, a good business plan can help you fix any issues. However, you can also hire a consultant to come in and help if you feel a plan has run off the rails.

 By focusing on the aims and objectives that you were unable to attain, a business plan can cause you to reflect on your past failures. Such a review of past performance may waste time and resources rather than focusing on how to move forward with confidence.

#3. No Guarantees Are Made

Even with the best research, best employees, and most comprehensive business plan on your side, failure is more likely than success. Many of those that start today will fail within five years, and many of them will have developed comprehensive business plans.

 We all know how quickly the world changes, so it’s extremely probable that your business plan will become obsolete by the time you’re ready to begin. A strong project roadmap is an excellent alternative to a business plan. This is because a business plan contains many critical details, such as the mission statement, that are unlikely to change in either direction. Furthermore, a strategy can assist in laying out the most adaptive and actionable path forward.

Business plans specify what should be done and how it should be done. A thriving business occasionally requires its most innovative employees to be given the freedom to develop novel ideas. Rather than that, the typical plan creates an environment in which the company’s executives dictate the company’s goals and mission to everyone. The people on the front lines are frequently denied the opportunity to influence the implementation of the business plan, which ultimately disadvantages the company.

However, you need to speak to a professional like BusinessYield Consult to help out with any of the disadvantages of the business plan that you might be facing.

Writing a business plan has both advantages and disadvantages, and anyone writing a business plan should keep the above factors in mind.

Planning helps to reduce future uncertainty. Although the future cannot be predicted with 100% precision, planning aids management in anticipating and preparing for risks by incorporating required provisions to meet unexpected events.

A business plan helps you clarify and focus your business ideas and strategies as an entrepreneur. You focus not only on financial difficulties, but also on management, human resource planning, technology, and adding value to your customers.

However, business planning is not a panacea and can occasionally result in the emergence of new problems such as:

• Lack of confidence…
• Lack of liberty

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The Consequences of Not Having a Business Plan

• November 28, 2022
• Business plans

Failing to have a business plan could lead to huge consequences for your business. Read this blog to find out the disadvantages of not having a business plan.

What Is a Business Plan?

A business plan is the big-picture idea for your business. It’s usually recorded on an official document and covers your business goals and how you plan to reach them. There’s a wide range of types of business plans, some of which include:

• Opportunity
• Municipality or Non-Profit

While these business plans tackle different objectives, there are two elements that should exist in all of them: goals and strategy. Every business plan should have goals and overarching strategies that can help you reach them.

While business plans are most helpful for start-up businesses, they’re a valuable tool for every business owner interested in organizing their objectives.

There are some serious consequences to not having a business plan. Some of them include:

A Lack of Direction

A business plan ensures that everyone is on the same page and working towards a common, well-established goal. Without a detailed business plan, your business could become lacking in direction, wasting time and money on things that don’t matter as much to the success and longevity of your business. Goals can exist without a business plan, sure, but they’re probably not clearly quantified. A business plan helps you create specific, actionable goals that help you succeed.

A business plan will also encourage you to form a strategic plan for how to reach your goals. Strategy is as important as the goals themselves—and that’s why many businesses fail to execute. For example, you may have a goal to reach $5,000,000 in sales, but how exactly do you plan on reaching that? Many businesses set specific goals but never reach them due to poor planning. A business plan avoids this issue by establishing goals and a plan for implementing the strategies you need to reach them.

Missed Growth Opportunities

Another consequence of not having a business plan includes missed opportunities for growth. An effective business plan will identify the opportunities your business can use to succeed. This gives you an idea of what a successful trajectory looks like for your business and how you can get there. Failing to plan ahead means that every business process will have to be handled in the moment. This can lead to poor decision making (and an enormous amount of stress), and it also means that energy is focused on putting out fires instead of pursuing novel business ideas.

In today’s business environment, it can often feel like you need to innovate or fail. Businesses need to be constantly looking for new opportunities to survive. A business plan could give you the time to make sure that your business is conducting marketing analysis and identifying growth opportunities you can take advantage of.

• Wasted Resources

Business plans are designed to maximize your organizational efficiency. Not planning ahead of time will lead to your business making inefficient budgeting, inventory, and operational decisions. This leads to:

• Inaccurate Budgets and Financial Projections
• Disrupted Project Timelines
• Inventory Strain
• Operational Disruptions

The above failures could compromise your business’s overall financial security and turn away potential investors. Failing to secure investments could seriously compromise your business’s stability, especially if you’re dependent on maintaining consistent working capital.

Unclear Organizational Structure

A business plan also defines clear roles for staff. Organizational hierarchy is key to making sure that your business has an effective line of communication and a level of accountability that keeps everyone honest. Without a business plan in place, there can be confusion and important tasks that fall through the cracks.

Having clear structures in place also makes it easier for employees to get answers to critical questions. Have you ever worked in a business where you weren’t sure who to contact when you had work-stopping issues? If so, you know that these kinds of problems can lead to colossal wastes of time and efficiency. The average employee takes 23 minutes to recover from an interruption to their work . A business plan could keep these interruptions from happening.

Don’t Know Where To Start With a Business Plan?

Learn more about business plan options today.

Failing to Prepare is Preparing to Fail: A Case Study

To illustrate the consequences of not having a business plan, let’s examine what happened when a real-world business failed to prepare.

Borders is a name you may remember. Established in 1971, it was a national bookstore chain that found high levels of success for decades. Borders got comfortable coasting on their tried-and-true business model and weren’t innovating when new technologies began to change the retail landscape in the 2000s. Borders was forced to make a fast decision—or shut down.

They thought the answer to their struggling business was more volume. They tried opening up more stores across the country, thinking that they weren’t targeting the right locations. Unfortunately, this ended up being the wrong decision. They declared bankruptcy in 2011, being forced to close 399 stores and lay off 10,700 employees. Borders could have avoided this by planning ahead. Instead of being prepared for changes to the business environment, they were addressing issues as they came, and they ended up paying the consequences.

Partner With GreenGate for the Plan Your Business Needs

Still not sure where to start with creating your next business plan? GreenGate can help! We’ve helped found over 400 businesses in the United States, and we want you to be our next success. Contact us today to take your business to the next level.

Welcome to Greengate Consulting, it’s great to see you here.

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Using partnerships and corporations to transfer farm assets

• Managing a farm
• Transfer and estate planning
• Utilizing partnerships and corporations to transfer farm assets

Quick facts

• Establishing a business entity, such as a partnership or corporation, can help with the process of transferring a farm business to the next generation.
• In Minnesota, there are two major categories of partnerships: partnerships and limited partnerships. 
• The two corporation entities available to farm businesses are S corporation and C corporation.

Developing any business entity is a complicated process. Seek assistance from a qualified legal expert and accounting assistance if you plan to explore developing a business entity.

Transferring the farm business to the next generation can be a daunting task. However, there are strategies and methods that can help simplify the process.

When operating as a sole proprietorship, it can be challenging to establish a transition plan. There are many individual assets that need to be accounted for such as machinery, equipment, livestock and land. It is difficult and time consuming to transfer separate, individual assets.

One possible solution is to establish a business entity such as a partnership or a corporation to accomplish the business transition. As members and owners of the entity, the parents are issued ownership shares or shares of stock in the entity. These shares can be sold, gifted or passed through an estate to the entering generation, over time, as a method of transferring the business. This does away with the need to transfer separate, individual assets. This also spreads out the parent’s income and thus tax obligations. It allows the entering generation the ability to acquire assets over time thus minimizing their need for large amounts of capital. 

In Minnesota, there are two major categories of partnerships: 1. partnerships and 2. limited partnerships. There are separate entities under each category which function differently.

1. Partnerships

There are two entities: general partnerships and limited liability partnerships.

General partnerships (GP)

Two or more people are required for the GP and are referred to as general partners. All partners are generally liable for all debts and obligations of the GP. There is no liability protection for their personal or partnership assets. Minnesota state law does not require a written partnership agreement. However, such an agreement outlining decision making and job responsibilities might be useful. If the name of the partnership is that of the partners (Henderson Family Partnership), the entity does not have to be registered with the State of Minnesota. The entity is taxed as a partnership, pass-through entity, with income allocated to each partner based on their ownership and included in their personal income tax.

Limited liability partnerships (LLP)

The LLP is similar to the GP with exceptions. All partners are general partners (no limited partners) but their liability exposure is limited to the assets they have placed into the LLP. Their personal assets are protected from liability exposure. The LLP is required to register with the Secretary of State in Minnesota. The LLP is taxed as a partnership, pass-through entity.

2. Limited partnerships

There are three partnership categories: limited partnership (LP), limited liability limited partnership (LLLP), and limited liability company (LLC).

Limited partnership (LP)

Two or more persons are required. There are both general and limited partners. General partners have no liability protection for their business assets but do for their personal assets. The limited partners’ assets in the LP as well as their personal assets have liability protection under the LP. The LP is required to register with the Secretary of State in Minnesota. and the Minnesota Department of Agriculture to comply with the Minnesota Corporate Farm Law. The LP is taxed as a partnership, pass-through entity.

Limited liability limited partnership (LLLP)

Two or more people are required. There are both general and limited partners and they have liability protection of both their LLLP assets and their personal assets. The State of Minnesota requires the LLLP be registered with the Secretary of State and the Minnesota Department of Agriculture to comply with the Minnesota Corporate Farm Law. The LLLP is taxed as a partnership, pass-through entity.

Limited liability company (LLC)

Requires only one person as a member of the entity. From a tax standpoint, the LLC can be taxed as a partnership pass-through entity or as an S Corporation. In addition, the LLC can afford tax savings via discounting assets and potential savings of self-employment taxes. The LLC provides liability protection much like that of a corporation.

The LLC has both members and managers. Members elect or appoint a board of directors. The State of Minnesota requires that the LLC register with the Secretary of State and the Minnesota Corporate Farm Law of Agriculture to comply with the Minnesota Corporate Farm Law.

The LLC can offer one additional level of liability protection by being registered in one of what are referred to as “protective states”. Although the list changes occasionally, some of the protective states include: Alaska, Arizona, Delaware, Nevada, New Jersey, South Dakota, Texas, Virginia and Wyoming. These states have written their LLC statutes to include an additional level of liability protection as long as the LLC members abide by all the statute rules. It is legal to register, for example, your Minnesota farm business in one of these protective states and still operate in Minnesota as you have been. You would need a contact in the state where registered. That contact would establish the entity on your behalf and at year end send you a K-1 form for income and you file your tax return just as you do now. This is a complicated process so seek expert legal help if you decide to develop an LLC in one of the protective states.

Registering with Minnesota Department of Agriculture

For the entities that are required to register with the Minnesota Department of Agriculture  for compliance with the Minnesota Corporate Farm Law, this is an annual requirement and there is a $15 fee required to file the documentations. In addition, land held in trust must also register annually with the Minnesota Department of Agriculture for compliance with the Minnesota Corporate Farm Law.

As mentioned, partnerships pay no income taxes. All profit/loss, capital gains and credits are passed through to the partners on a prorated basis, depending upon the percent of ownership. However, the partnership must file a Form 1065 informational tax return, which is due each year by April 15.

Advantages and disadvantages

An advantage over sole proprietorship is that the owners have ownership units or shares. These units or shares can be sold, gifted or passed through an estate as a means of transferring the business over time to the entering generation.

One disadvantage with a partnership, except the LLC, is that the death of a shareholder or willful withdrawal by a partner can seriously disrupt partnership operations. The partnership agreement, if put into place at time of formation of the entity, should clearly describe buy-out provisions or state how the remaining partners are protected, no matter how circumstances change.

Partnership tax laws

Partnership tax laws are similar to individual tax laws. A partnership can generally take over the depreciation schedule of contributed machinery or buildings. A partnership can claim the Section 179 depreciation expense which is passed on pro rata to the partners. Each partner can claim depreciation, which includes his or her portion of the partnership allocation plus any other personal Section 179 depreciation.

Partnership members are self-employed individuals and must pay self-employment tax on their share of earned partnership profits. Partnerships do not receive the favorable tax treatment on fringe benefits (medical, accident and life insurance, housing and meals) as do “C” corporations. However, it generally costs less to form a partnership than a corporation and partnerships can be less formal to operate.

There are two corporation entities available to farm businesses. They are: S corporation and C corporation.

1. S corporation

The S corporation offers a higher level of asset liability protection than a sole proprietorship and some of the partnerships. It must be registered with the Secretary of State in Minnesota. The S corporation is taxed as a pass-through entity with profits allocated to the stock shareholders based upon their ownership percentage. The income then shows up on the shareholders personal income tax. There is no double taxation issue.

Business operating assets can be placed into the S corporation or they can be left out with only the corporate checkbook as part of the corporation operating entity. Placing assets into the corporation is a non-taxable event but getting them out is not. For that reason, it is a general rule of thumb not to place land into the corporation. See your attorney and accountant for advice specific to your situation.

2. C corporation

The C corporation also affords a higher level of asset protection than the sole proprietorship or some of the partnership entities. The C corporation offers longevity to the business because it is technically an entity onto itself with a life of its own. That is, people can enter and leave the C corporation and it continues on without interruption. It also affords many tax advantages regarding deductible expenses.

The C corporation however, can be subject to double taxation. The dividends paid to shareholders are taxed. If the corporation is not growing or acquiring new assets resulting in the corporation retaining earnings, those earnings can be taxed as well. Corporate tax rates are generally higher than other tax rates. Business operating assets can be placed into the C corporation or they can be left out with only the corporate checkbook as part of the corporation operating entity. Placing assets into the corporation is a non-taxable event but getting them out is not. For that reason, it is a general rule of thumb not to place land into the corporation. See your attorney and accountant for advice specific to your situation.

One additional point that applies to both S and C corporations. Shareholders have to maintain an employer-employee relationship with the corporation. If the shareholders maintain personal ownership of what they consider corporate assets, charge corporate business expense against those assets, are audited by the IRS, they may be denied those expense deductions because the assets were owned by the shareholders, not the corporation.

A corporation is established under state law. Each state permits corporations the right to do business. A corporation consists of owners who are called shareholders. The shareholders are the basic decision making group. They elect a board of directors to act for them on most operational decisions. Majority vote governs corporate decisions. Ownership of 51 percent or more of the stock gives you control. Minority shareholders have little if any decision making control unless permitted to do so by the majority shareholders.

Once a corporation is created, it functions much as a self-employed individual might. Corporations must establish their own name and bank accounts. The corporation can become an employer, a lessor or lessee, a buyer or seller, or engage in any other business activity.

Reasons why farms incorporate 

• It is easy to transfer shares. Shareholders can gift, sell or pass through an estate, shares to others as they see fit. A majority shareholder can transfer up to 49 percent of the outstanding shares without losing control of the business.
• A corporation may simplify estate settlement in that it may be easier to value shares than individual farming assets.
• Self-employment (SE) tax can sometimes be reduced with a corporate structure. Instead of paying SE tax on all the Schedule F income as a self-employed individual would, the farmer becomes an employee of the corporation and social security taxes are paid only on wages they receive. See your accountant.
• A portion of meals and lodging furnished to employees of a C corporation are generally deductible to the corporation, but not taxable income to the employee. If lodging is provided on the farm and is a condition of employment, the home’s depreciation, heat, electricity and interest become deductible to the corporation. Remember the employer-employee relationship issue.
• Fringe benefits are deductible by C corporations. Health, accident and up to $50,000 of term life insurance is deductible to the corporation, but not taxable to employees.
• The corporation offers perpetual life, some economic efficiencies regarding capital acquisition, and provides income and social security tax flexibility. It can also provide continuation of a farm business through several generations.

Potential concerns related to the corporation

• Getting into a corporation is generally a tax-free event. Getting out is a taxable event. Don’t start a corporation unless you plan to continue it for many years.
• If the C corporation is profitable but is not growing and acquiring new assets, it can be troubled with retained earnings or excess profits. This can result in a tax obligation.
• Corporations have a different set of rules. Corporate meetings, extra record keeping, corporate income tax returns, reporting requirements, and quarterly tax estimates are part of corporate life. Complying with extra legal and regulatory requirements cost time and money each year.
• Minority shareholders have no power in directing the corporate business and can be easily “frozen out.” A majority shareholder (farming heir) can direct that no dividends be paid. Minority (non-farm heirs), may own shares that generate no income, and hence have no practical value.
• Corporate ownership of a house eliminates the use of the exclusion of gain or a sale of personal residence.
• Corporate ownership sometimes reduces independence and individual pride of ownership.
• It can be very difficult for a retired shareholder to receive any retirement income from an operating corporation. This is especially true if the retiree has no rental property, discontinues working for the corporation, and the corporation pays no dividends.

The farm corporation can be a valuable tool in tax planning and in the transfer process. However, it is a major commitment and a complex task to start a farm corporation. Before starting a corporation, make sure it fits your goals, objectives and business personality.

Self-employment tax on land, buildings and facility rent regarding entities

The US Eight Circuit Court of Appeals has ruled that if you are a member of any business entity (such as a partnership or corporation explained above); own land, buildings, or facilities that are outside that entity; and rent those items to the entity; the rental income is exempt for self-employment tax IF the rent is fair and reasonable.

This applies only to those states in the eighth circuit which include Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. With any of these laws, they are subject to change so seek legal advice on this matter.

Discounting business entity assets

An additional strategy that may be useful is the discounting of assets being placed into a business entity, such as any of the partnerships or corporations described earlier.

When you place business assets such as machinery or livestock into the business entity, you can elect to discount those assets. The main reason for discounting assets being placed into the business entity is to reduce the size of an estate in order to get below the federal and perhaps even the state estate applicable exclusion amounts. Doing so will reduce or eliminate any estate tax.

Justification for the discount is based upon lack of marketability of the assets due to a fractional ownership interest.

One disadvantage of discounting is that you have artificially lowered the basis of the assets in the entity. This can be a problem if the entity is discontinued and the assets are sold as a result. This could result in a tax obligation. If the assets are replaced due to use, this is not an issue.

Assets being discounted and placed into an entity should be appraised. If, at a future date, the entity is audited by the IRS, you can document the value of the assets placed into the entity. For machinery and equipment, simply take the depreciation schedule to the local implement or equipment dealer and ask them to put a value on all machinery. Have them put the values in writing on their dealership letterhead along with a signature and date. For livestock you can take a list to a livestock auction facility or someone who deals in livestock and would have a grasp of the values. The values should be put in writing and listed on their letterhead with a signature and date. For land, seek the help of a realtor who deals with ag land. Simply have them do an estimate or appraisal of the land, put it in writing on their letterhead, with a signature and date.

Note:  In late 2016, the Internal Revenue Service and the US Treasury Department enacted 2704 rules which drastically changed discounting rules and during which situations they may apply. If assets are transferred and then sold, discounting will definitely not apply.  If you are contemplating discounting any assets seek legal and accounting assistance to make sure you are in compliance with 2704 rules.

Business entities and maintaining homestead classification

When using a business entity for ag land ownership, caution must be used in order to maintain eligibility for the Minnesota Qualified Small Business Property Qualified Farm Business Property estate exclusion. In addition, utilizing limited liability companies (LLCs) as a business entity have new rules to comply with due to passage of the Minnesota Revised Uniform Limited Liability Company Act of 2015. The law states the land-owning LLC and its members must be the ones farming the land on behalf of the owner LLC. If the owner LLC rents the land to someone else, even another member of the LLC who then farms it personally, homestead classification is lost and therefore the qualified farm property estate exclusion is also lost. New LLCs must have complied with the new law as of August 1, 2015. Existing LLCs must have complied with the new law by January 1, 2018.

Ag land held in any trust, except a revocable living trust, as well as land in limited partnerships, limited liability limited partnerships, S and C corporations and LLCs must file documentation with the Minnesota Department of Agriculture under the Minnesota Corporate Farm Law in order to be eligible for the qualified farm property exclusion. The application must be done annually and there is a filing fee of $15 per application.

For more details on the Minnesota Homestead Classification requirements see maintaining farm land homestead classification and qualification . This is a complex area and there is a lot at stake regarding the qualified farm property estate exclusion so seek legal advice specific to your situation when establishing any entity that owns ag land.

Farm Service Agency (FSA) payments and business entities

Under the current farm bill, there are some restrictions regarding commodity program payments made to individuals versus entities. Entities that limit member’s liability exposure (all entities except the general partnership) are limited to one maximum payment limit regarding FSA commodity program payments.

This is a complicated issue. If you have any questions or concerns related to your situation, check with your FSA office for details of the program.

Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.

Gary Hachfeld, former Extension educator; David Bau, Extension educator and C. Robert Holcomb, Extension educator

Reviewed in 2017

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