The purpose and contents of a business plan; the role of objectives and mission; SMART objectives; the benefits and limitations of planning; and how a plan supports raising finance and managing a start-up.

What this theme is asking

Eduqas expects you to know what a business plan is for, what it contains, and how it links to the objectives and mission a start-up sets itself. You also need the benefits and limitations of planning, and how a plan helps an entrepreneur raise finance and manage the early life of the business. This builds directly on the enterprise idea: the plan is how an assessed opportunity becomes a structured, fundable venture.

What a business plan is and why it is written

The plan serves four main purposes:

• Clarifies and tests the idea. Writing it down exposes weak assumptions and gaps before money is committed.
• Reduces risk. Research and forecasting make the entrepreneur confront demand, costs and cash flow rather than relying on optimism.
• Raises finance. Banks and investors will not provide funding without a credible plan showing how their money will be used and repaid.
• Provides a benchmark. Once trading, the firm compares actual results with the plan to spot problems early and control performance.

What a business plan contains

A typical plan includes:

• an executive summary (a short overview of the whole plan),
• the business idea and aims (what the business does and its mission and objectives),
• the market and competition (target customers, market size, rivals, from market research),
• the marketing plan (the products, prices, promotion and place: the marketing mix),
• the operations plan (how the product is made or the service delivered, location, suppliers),
• the people (the entrepreneur and any management team and their skills),
• the financial forecasts (cash-flow forecast, break-even, forecast profit, and the sources and amount of finance required).

Mission and objectives

For a start-up, common objectives are survival (getting through the first risky year), breaking even, building a customer base and establishing the brand, before later objectives such as profit and growth.

Benefits and limitations of planning

The benefits are real: planning reduces risk, attracts finance, coordinates the start-up, and gives a yardstick for control. But planning has limitations. Forecasts for a new business have no trading history to rest on, so they are uncertain and can be over-optimistic. Markets and costs change, so a plan dates quickly. Time and money spent planning could delay launch. And a plan can give false confidence if treated as a guarantee. The resolution is to treat the plan as a living document, revised as the business learns, rather than a one-off prediction.

Examples in context

A would-be restaurateur uses a plan to convince a bank to lend the start-up capital, because the bank needs to see forecast cash flow and break-even before committing. A tech founder writes a lean plan to test the idea cheaply and pitch to investors. A market-stall trader sets the SMART objective of "covering all costs within three months", giving a clear survival target to manage against. In each case the plan turns enterprise into a structured, fundable, manageable venture.

Try this

Q1. State what the letters SMART stand for in SMART objectives. [2 marks]

• Cue. Specific, Measurable, Achievable, Relevant, Time-bound.

Q2. Explain one reason a bank would require a business plan before lending to a start-up. [3 marks]

• Cue. The plan shows forecast cash flow, break-even and how much finance is needed, so the bank can judge whether the business is viable and able to repay the loan.