the capital in business plan

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• Business Taxes

What Is Capital in Business?

Capital Structure of a Business Explaineed

• What is Capital in a Business?
• Capital Structure of a Business

Other Terms for Business Capital

Business capital and taxes.

• Asset Information for Taxes

Frequently Asked Questions (FAQs)

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The term capital has several meanings, and it is used in several areas in business. In general, capital is accumulated assets or ownership. The roots of the term "capital" go back to Latin, where the term was capitālis, "head," and Latin capitale "wealth.

Capital is important to businesses because the cost of buying and owning these investments can affect the business's value and tax situation.

Key Takeaways

• Business capital is all of the long-term assets of the business that have value while the business is operating and in the sale of a business.
• Capital in accounting terms is the accumulated wealth or net worth of a business and the owners, expressed as the value of its assets minus its liabilities.
• Capital in taxes is assets that a business uses to make a profit.
• A business can lower its business taxes by spreading out its tax deductions for capital expenses over several years.

Capital in Business

Business capital is in the form of assets (things of value). Capital is a necessary part of business ownership because businesses use assets to create products and services to sell to customers. Capital can have one of three specific meanings:

• The amount of cash and other assets (owned by a business, including accounts receivable, equipment, inventory, and buildings of the business)
• The accumulated wealth or net worth of a business, represented on a balance sheet by its owner's equity (ownership) minus  liabilities
• Stock or ownership in a company, the capital account of a stockholder

Capital for Tax Purposes

The Internal Revenue Service (IRS) uses the term capital assets to describe assets that are used to generate a profit. These assets aren't easily turned into cash and they are expected to last more than one year. A building, equipment, and vehicles are examples of capital assets for tax purposes.

Capital Structure of a Business 

The capital structure of a business is the mix of types of debt (borrowing) and equity (ownership). Business capital is shown on the business's balance sheet . The format for this report shows all the asses of the business in one column and the liabilities and owner equity in the other. Total assets must equal total liabilities plus total owner equity.

Another way to express capital in business is through its  debt to equity  ratio. This ratio divides the company's total liabilities by its shareholder equity, measuring how much of the company is financed by debt. An acceptable ratio is 2:1, meaning that debt can be two times equity.

Other associated terms which relate to capital in business situations are:

• Capital gains : Capital gains and losses are increases or decreases in the value of stock and other investment assets when they are sold.
• Capital improvements : Improvements made to capital assets, to increase their useful life, or add to the value of these assets. Capital improvements may be structural improvements or other renovations to a building to enhance usefulness or productivity.
• Venture capital : Private funding (capital investment) provided by individuals or other businesses to new business ventures.
• Capital lease : A lease of business equipment that represents ownership and is shown in the company's balance sheet as an asset.
• Capital contribution : A contribution to the business by an owner, partner, or shareholder in the form of money or property. The contribution increases the owner's equity (investment) in the company.

Businesses with capital assets must deal with two types of tax reporting. The business must report depreciation, amortization, and deductions for income taxes during the time the business owns the asset. It must also report and pay capital gains taxes when the asset is sold.

Income Taxes

The expense of buying or improving an asset must be capitalized for income tax purposes. That means the assets must be spread out over a number of years, rather than being deducted in one year. Each year, the business can take a tax deduction for the yearly deduction for all capital assets.

The two processes for capitalizing assets are:

• Depreciation : For tangible assets like vehicles, equipment, furniture, and buildings
• Amortization : For intangible assets like patents, trademarks, and trade secrets

Capital improvements on an asset, which add to an asset's value and must be capitalized, are distinguished from repairs, which are deductible.

Some deductible repairs are painting, repairing a roof, or fixing an elevator. Some capital improvements that must be depreciated including replacing a roof or improving a storefront.

Business startup costs are considered capital assets and they must be amortized. But you may be able to up to $5,000 of business startup costs and $5,000 of organization costs (for forming and registering your new business) in the first year you are in business.

Capital Gains Tax

Businesses that have capital assets must pay capital gains tax on those assets when they are sold. Capital gains taxes are payable at a different rate from ordinary business gains. Short-term capital gains are taxed as ordinary income to the individual, and corporations pay short-term capital gains tax at the regular corporate tax rate of 21%. Long-term capital gains (held more than a year) are taxed at different rates, depending on the individual's income.

Gathering Asset Information for Taxes

Capitalizing business assets is probably the most difficult and complicated part of business taxes; it's not something you should attempt yourself. Before you turn over your yearly records to your tax preparer, gather all the information you can on the original costs of each asset, called " asset basis ."

Information for asset basis for physical assets includes:

• Sales price
• Installation and training
• Recording fees
• Permits and inspection fees

The asset basis for intangible assets like patents, copyrights, trademarks, trade names, and franchises is usually the cost to buy or create it. For a patent, for example, the basis is the cost of development, including costs of research and experiment, drawings, working models, attorney fees, and application fees. You can't include your time as the inventor, but you can include the time for workers you paid to help you.

What is capital in business?

Capital is the assets (things of value) in a business that the business uses as collateral for loans and to pay expenses. For tax purposes, business capital assets are the long-term assets (like equipment, vehicles, and furniture) used to make a profit.

You can see the types of business capital by looking at the "Assets" column on a business balance sheet. A balance sheet shows assets on one side and liabilities (what's owed to others) plus owner's equity (ownership) on the other side, with total assets equal to total liability + owner's equity.

What is an example of capital in a business?

Here's a list of all the types of business capital as they are shown on a business balance sheet. They are in order by how quickly they can be turned into cash, and categorized by short-term and long-term assets.

Short-term assets are used up or paid within a year.

• Accounts receivable (money owed by others)
• Prepaids (like insurance)

Long-term assets (capital assets) are used over a number of years:

• Furniture and Fixtures
• Equipment and Machinery
• Land and Buildings

How do businesses use capital?

Capital is important to a business in both short-term and long-term situations. In the short term, it's used to fund operations. For example, cash is an important asset to a business because it is used to pay expenses.

In the long term, capital assets like buildings and can be used as collateral for a business loan. For example, the equity in a business building can be used to get a second mortgage. To finance short-term cash flow shortages, a business can sell accounts receivable to a factoring service for quick cash.

Why do businesses need capital?

Businesses need capital to attract investors. Investors can use capital to analyze the strength of a business, using a debt-to-equity ratio. This ratio compares long-term capital to owner's equity; an acceptable ratio of 2:1, meaning that debt is twice equity.

Capital is also important in selling a business because buyers also look at the strength of business assets and their usefulness to fund the business purchase or make changes. For example, a buyer could sell off several buildings to get cash to expand into other markets.

Legal Information Institute. " Capital Assets ." Accessed Aug. 12, 2021.

International Journal of Management Sciences, " Financial Ratio Analysis of Firms: A Tool for Decision Making ," Page 136-37. Accessed Aug. 19, 2021.

Tax Policy Center. " How Does Corporate Income Tax Work ?" Accessed Aug. 19, 2021.

IRS. " Capital Gains and Losses - 10 Helpful Facts to Know ." Accessed Aug. 19, 2021.

IRS. " Publication 551 Basis of Assets ." Accessed Aug. 19, 2021.

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Understanding the Importance of Capital in Business: A Comprehensive Guide

For a business to operate successfully, it requires capital. Capital is the lifeblood of a business that fuels day-to-day operations and drives growth. Capital is essentially the money and assets a company has available to support its operations and to expand. This article will dive deep into everything you need to know about capital in business, including what it is, the different types, sources, and strategies in financial management, the impact of capital on business growth, and much more.

Start with the basics

Capital refers to the money and assets that a company uses to operate and grow its business. It is the foundation of any company, whether it is a small startup or a multinational corporation. In a business context, capital can be divided into two types: working capital and fixed capital. Working capital is the capital used for day-to-day business operations, including paying rent, salaries, and bills. Fixed capital, on the other hand, refers to long-term assets that a company uses for its operations, such as machinery, equipment, and facilities.

Both types of capital are critical for a business to thrive. Working capital helps keep the business running in the short term, while fixed capital helps in long-term planning for expansion and growth. Without working capital, a business will not be able to pay its bills, and without fixed capital, a company cannot invest and expand.

Take a historical approach

The use of capital in business has evolved over time. In the early days of business, individuals would provide capital for businesses by investing in them. However, as businesses grew, it became more challenging to raise capital. This led to the development of financial intermediaries such as banks and stock markets. These institutions made it easier for businesses to raise capital by providing them with access to a pool of investors.

Advancements in technology and globalization have further impacted the acquisition and use of capital. Improvements in technology have made it easier for businesses to access financing options, and globalization has opened up new markets for businesses to explore. However, it has also brought new challenges. With different banking systems and regulations worldwide, businesses must navigate complicated financial systems to access capital. Additionally, globalization has increased competition, requiring businesses to be more innovative to attract investors.

Through the years, various financial instruments have emerged to aid businesses in their pursuit of capital. One such instrument is stocks and bonds. These complex financial instruments allow businesses to raise funds by selling shares of ownership or by borrowing money. They have revolutionized how businesses raise capital, giving them more flexibility and options.

Focus on the different sources of capital

There are various ways that businesses can acquire capital. Some businesses may seek loans, equity, crowdfunding or other funds. Each source has its advantages and disadvantages. For instance, loans usually have fixed repayment terms and interest rates, while equity can be attractive because it does not need to be repaid and gives investors a share of ownership in the business.

Crowdfunding is a relatively new source of capital for businesses, and it involves obtaining funds from a collection of investors, often online. While crowdfunding has made it easier for small businesses to get started, it also has its own set of challenges. On the one hand, crowdfunding can help businesses create a following of loyal customers and brand advocates. On the other hand, it may also expose businesses to a larger public and critics who are not customers.

It’s essential for business owners to understand the pros and cons of each source of capital and evaluate which one is most suitable for them. It’s also worth considering that different sources of capital may be more appropriate for different stages in a business’s lifecycle. For example, an early-stage startup may require more equity, while an established business may need less and prefer to raise funds through long-term borrowing.

Finally, businesses must consider the success stories of other companies that have used different types of capital to their advantage. For example, Kevin Systrom and Mike Krieger, the founders of Instagram, invested $500,000 of their own money in their startup. They later raised $7 million from investors to help their business grow. This success story demonstrates how smart use of capital played a significant role in the growth of Instagram. It’s essential for businesses to consider the use of capital when planning their expansion strategy.

Highlight the role of financial management

Financial management is an essential component of a successful business. It involves planning and executing strategies to raise capital, invest it wisely, and track it over time. Businesses that have good financial management skills are better able to manage risk and make sound business decisions.

Strategies for raising and investing capital vary depending on the business’s lifecycle stage and primary objectives. For example, a startup may focus on obtaining seed capital, while a more established business may be more concerned with long-term planning and investments. Regardless of the stage of business, it’s essential to track the capital invested and the returns obtained to ensure you stay on track.

Good financial management is critical for business owners to understand. It is important for businesses to create a solid financial plan that is well aligned with their goals, objectives and investment strategy. Businesses should also have an ongoing system to track their expenses and monitor their income and cash flows.

Discuss the impact of capital on business growth

Capital plays a vital role in driving business growth. Businesses need capital to expand and enter new markets. However, the amount of capital required will depend on the type and size of a business, as well as its strategy and goals.

One of the challenges businesses face when it comes to acquiring capital for growth is determining the amount of capital necessary. Undercapitalization can make it challenging for businesses to expand, as it can limit the amount of capital available for growth. On the other hand, overfunding can lead to a lack of discipline when it comes to managing the resources, which can lead to the failure of the business.

To overcome these challenges, businesses need to develop a strategic growth plan that anticipates the need for additional capital and accounts for the risks and challenges associated with growth. The plan should define the sources of capital to be acquired, the timing, and the expected usage of funds raised.

In summary, capital is the lifeblood of any business, and its importance cannot be overstated. Businesses need the right amount of capital to keep the lights on in the short term and to expand and grow in the long term. Business owners need to understand the different types of capital available, the sources and strategies in financial management, and the impact of capital on business growth.

A business’s long-term success depends on its ability to acquire and use the right amount of capital effectively. Business owners should continually evaluate their financial situation and prioritize their financial management skills to create a solid foundation for sustainable growth.

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Home > Business Plan > Funding Requirements in a Business Plan

Funding Requirements in a Business Plan

… our funding requirements are …

The summary given in the funding requirement section should be consistent with the rest of the business plan. The amount needed, and when it is needed should follow from the detailed financial projections, and the purpose of the funding, sales and marketing, hire of employees, to achieve a milestone etc. should again link in with the rest of the plan,

Funding Requirements Presentation

This is part of the financial projections and Contents of a Business Plan Guide , a series of posts on what each section of a simple business plan should include. The next post in this series is the final section, and deals with the planned exit for investors.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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• Accounting Terms

What is Capital in Business Finance?

In business, Capital refers to the financial assets or resources that a company uses to fund its operations, invest in growth, and generate income. This can include funds raised from investors, retained earnings, or loans. Capital is essential for business expansion, product development, and overall financial stability. Effective capital management is key to sustaining operations and driving long-term success.

Role of Capital in Business Growth

Ever wondered how businesses transform from small startups to industry giants? The secret ingredient is often capital. It’s like fuel for a car, propelling businesses forward.

Capital in business isn’t just about money; it’s the cornerstone for growth and expansion. It enables businesses to invest in new technologies, hire additional staff, and break into new markets.

Without adequate capital, businesses might struggle to compete or even remain viable. Imagine trying to cook a feast with a single pan and a spoon; that’s a business trying to grow without enough capital. So, we see, capital isn’t just important; it’s essential for business growth.

Sources of Capital for Businesses

Now, let’s talk about where businesses get their capital. Think of it as a toolbox; each tool serves a different purpose.

Some common sources are:

• Equity Financing: Selling a piece of the business pie in exchange for capital. It’s like inviting others to the table in return for their financial contribution.
• Debt Financing: Borrowing money that must be paid back with interest. Think of it as a loan from a friend but with formal terms and conditions.
• Personal Savings: The entrepreneur’s own money. It’s akin to using your savings to start a dream project.
• Government Grants: Funds provided by the government, often for specific projects or initiatives. Picture it as a helping hand from the government.

Each source has its pros and cons, and the right mix depends on the business’s needs, goals, and stage of development.

Managing and Allocating Capital Effectively

Getting capital is one thing, but using it wisely is a whole different ball game. Effective capital management is critical for business success.

It involves:

• Making Strategic Investments: Like a chess player, businesses must think several moves ahead, investing in areas that will yield the best returns.
• Maintaining Liquidity: Ensuring there’s enough cash flow to meet day-to-day expenses. It’s like keeping enough water in the tank to quench your thirst on a hot day.
• Risk Management: Balancing high-reward investments with safer bets. Similar to not putting all your eggs in one basket.

This balancing act is vital for long-term sustainability and growth.

Frequently Asked Questions

What are the different forms of capital in business.

In business, capital takes various forms. The most common are:

• Financial Capital: Funds available for use in business activities.
• Physical Capital: Tangible assets like machinery and buildings.
• Human Capital: The skills and knowledge of the workforce.
• Intellectual Capital: Intangible assets like patents and trademarks.

How do businesses decide where to allocate capital?

Businesses often allocate capital based on:

• Strategic Goals: Aligning investments with the company’s long-term vision.
• Return on Investment: Prioritizing areas with the highest profit potential.
• Risk Assessment: Weighing the potential risks against the benefits.

What are the risks associated with capital management?

Capital management comes with risks like:

• Market Risk: The chance of losses due to market fluctuations.
• Liquidity Risk: The risk of being unable to meet short-term financial obligations.
• Credit Risk: The risk that borrowers won’t repay their debts.

The Quickest Way to turn a Business Idea into a Business Plan

Fill-in-the-blanks and automatic financials make it easy.

Keep calm and allocate capital: Six process improvements

Most large corporations have annual processes to allocate capital and other resources across business units and for strategic initiatives enterprise-wide. The typical practice is to begin with a strategy or “strategic refresh,” develop a long-term (three- to seven-year) financial plan, and lay out a highly detailed budget for the first year of the plan. Unfortunately, the processes are often both muddled and rigid; they typically take months to iterate, generate reams of distracting detail—and then fail to allow for sufficient flexibility to adjust resource allocation over the year. The result: a failure to align resources with strategy.

Every company faces unique challenges. Not all of the measures we describe in this article will be appropriate in every situation, and there’s no one-size-fits-all list of process improvements. However, we find that in most cases, senior leaders should do the following:

• As part of the strategy or strategic refresh, identify the role of each business in realizing the company’s strategy (for example, to accelerate growth, improve ROIC, or to divest) and the company’s ten to 30 most important initiatives.
• Use a streamlined approach to develop the company’s long-term financial plan by employing a value driver model, with only a few line items for each individual business unit or product line.
• Ensure that the long-term financial plan allocates resources to the company’s ten to 30 most important initiatives.
• Match next year’s budget to the first year of the long-term financial plan.
• Keep to a compact planning schedule.
• Design in-year flexibility, at a regular cadence, to allocate more (or less) resources to existing or new initiatives.

In this article, which is part of our ongoing “Strategy to action” to help companies improve resource allocation, we explain each of these six critical process improvements.

1. Identify each business unit’s role and the most important enterprise initiatives

Every strategic refresh should address two fundamental questions: first, what is the role of each business in realizing company strategy (such as to accelerate growth, improve ROIC, or divest), and second, which specific initiatives are the highest priority for the company, within that business and across the enterprise. In our experience, we have found that the sweet spot for companies is ten to 30 essential initiatives. If the list is longer than that, it can diffuse attention and become impractical to manage. If it’s shorter, it probably misses some important initiatives that top management should be involved with.

For example, a company may announce that its strategy is to grow in Latin America. That may be a terrific idea, but without more detail it isn’t actionable. Resources can’t be allocated to catchphrases. What would a practical Latin America growth strategy look like? To start, the company should identify the specific countries it will focus on. Next, it should spell out the major considerations, such as whether the company intends to enter a country on its own (perhaps using a team in a country relatively near where it already has a presence), partner with an existing player in that market, or make an acquisition. The company should also allocate the capital needed for whichever of those options (or others) it intends to pursue. Nor is money enough. The company should identify which business or team will be accountable, name a full-time team leader, be clear about which steps are needed (for example, identifying targets and building relationships), and make sure that the initiative is not starved of money or senior-management attention.

2. Focus on a small number of key value drivers for the long-term financial plan

Most companies’ long-term financial plans include too many line items. This kind of detail slows down the process, makes iteration difficult, and can obscure the true drivers of value.

To be effective, a long-term financial plan needs to be concise. For example, there is no need for ten or more items under general and administrative (G&A) expenses; the G&A line can stand alone. In most cases, income statements for each business should include only revenues, cost of goods sold, sales and marketing, R&D, and overhead costs—without disaggregating detail. An enterprise runs on value drivers, not accounting items. An effective financial plan clearly lays out the most important value drivers for each business unit, surfacing the few key elements that are most important for profitable growth, return on capital, and other company imperatives.

What do key value drivers look like? Consider a filmmaking company: there is a lot that goes into creating successful movies over a multiyear period. But cut to the chase (as they say in Hollywood), and its model can be simplified to producing three blockbusters and five smaller films. Its most impactful value drivers are the average budgets for large and small films, marketing costs, and overhead expenses. A music subscription business, for its part, would have similarly compact but completely different key drivers: the number of subscribers, revenue per customer, and customer churn.

Many senior leaders push back on “keep it simple,” saying that it is impossible to distill their businesses into just a few drivers. But these leaders are mistaking the forest for the trees—and underestimating the costs of examining too many trees.

In our experience, many senior leaders push back on “keep it simple,” saying that it is impossible to distill their businesses into just a few drivers. But these leaders are mistaking the forest for the trees—and underestimating the costs of examining too many trees. It isn’t possible to achieve 100 percent certainty in a complex business; regardless of industry, a competitive landscape is constantly shifting and usually can’t be predicted to a few percentage points. Parsing excessive line items, meanwhile, takes away time that could be better spent managing issues that have more of an impact, and yields diminishing returns. Often, the extra detail delivers no benefits at all.

While the number of line items should be kept to a minimum, the number of business units or product lines should be sufficiently granular to aid the allocation of resources based on the roles, objectives, and needs of each business unit. For example, a division with a fast-growing business unit and a mature or shrinking business should be divided into two businesses, so that top management can ensure that each has the right goals and resources (even if the division leader remains responsible for execution). In practice, a large corporation’s long-range financial plan should typically cover 20 to 50 product lines or business units.

3. Ensure that resources are allocated to the most important priorities

We’ve been surveying senior leaders for years, and a majority of them report that their organizations are underinvesting. Digging deeper, this usually means that companies don’t allocate the proper resources to the most important strategic initiatives, especially growth initiatives. Often, the long-range financial plan simply states the targets and financial projections for each business unit.

A better approach is to be clear on targets and have the long-range financial plan highlight the specific resources that are allocated to the highest-priority initiatives, whether they are enterprise-wide or within a particular business unit, to make sure those targets are met. This typically requires the company to allocate resources among its business units differently from how it had in prior years, regardless of legacy spending or “fairness.”

For example, one major consumer-packaged-goods company took away the “base” level of spending for some of its legacy European operations because of their lack of growth and relatively low returns on capital. Instead, the company allocated those resources to three specific initiatives in Latin America. And at one leading retailer, the CEO personally ensures the full funding and management of the company’s top six enterprise initiatives, in addition to spending almost one day per week on those initiatives.

4. Base this year’s budget on the first year of the long-term financial plan

Remarkably, the prolonged financial-planning process usually ends with a year one budget that does not tie to the long-range financial plan; instead, the year one budget is often closer to the last year’s budget. In a McKinsey survey of over 1,200 executives, less than one-third  of participants reported that their company’s budgets were similar or very similar to their most recent strategic plans. 1 “ The finer points of linking resource allocation to value creation ,” McKinsey, March 29, 2017. Another study revealed a striking 90 percent correlation in investment spending from year to year. 2 Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies , New York, NY: John Wiley & Sons, 2020. While some degree of year-to-year correlation is to be expected, it’s clearly impossible for a company to boldly reallocate capital (an approach that our research shows creates the most value  for companies on the whole) when it keeps allocating capital to essentially the exact same things.

While the year one budget should be more detailed than the long-term financial plan, the top-line revenues, profits, and cash flows for each unit should always match year one of the long-term plan. Two techniques are useful for making this happen. First, start building the budget based on the initial year of the financial plan, rather than on last year’s budget or current year’s results. Second, require that only the CEO and CFO have authority to approve deviations from the long-range plan. Without that rigor, resource allocation tends to dissipate in a fog of war.

5. Compress the time frame for the entire planning process

Financial planning can be a never-ending story. A senior team starts with a strategic refresh in the first quarter, followed by a long-term financial plan that kicks off in the second quarter, and finishes toward the end of the third quarter. Meanwhile, the budget for the next year begins in the third quarter and wraps up at the turn of the year—or even later. This prolonged timeline invites unnecessary draft turning and complexity, and diminishes the forcing-mechanism value of having to make a decision on the most important initiatives and value drivers.

The resource allocation process should be synchronized and as short as possible, with each step taking a maximum of two months. These steps should be scheduled as late in the year as possible, while still allowing ample time for rigorous analysis and meaningful debate. The entire process should also be contiguous.

One consumer retail company’s process serves as an example of an inefficient resource allocation timeline. The company conducts its annual strategic refresh in April or May, followed by long-term financial planning in September and October. Finally, after about two more months of hiatus, the budgeting process takes place from December until March for the calendar year that has already begun. Each step in the process is excessively time-consuming and remarkably disconnected from one another. A consumer-packaged-goods company, by contrast, demonstrates a more effective resource allocation timeline. The company initiates its annual strategic refresh in May, which drives the long-term strategic financial plan and resource allocation process conducted from June until September. The long-term strategic financial plan flows into the annual budgeting process, which starts in October and ends in November.

A process that runs from May to November is better than one that runs all year long and into the next, but it can still be significantly improved. First, any gaps in the processes should be eliminated; the longer plans sit, the more stale and less urgent they become. Second, decision makers should realize that multiple iterations are a tax on their time—they should receive one or two bites of the apple, and put in the work up front to make sure there aren’t excessive numbers of drafts. Finally, the second quarter is simply too soon to start; it provides an unnecessary cushion, at the expense of harder deadlines and greater focus.

Nothing so concentrates the mind as 24 weeks to finish a strategic refresh, a long-term financial plan, and year one of next year’s budget.

Precise timelines will vary depending on the enterprise—which in turn depends on its industry (technology companies, for example, move much faster). But to borrow from the old saying, nothing so concentrates the mind as 24 weeks to finish a strategic refresh, a long-term financial plan, and year one of next year’s budget. In most cases, a company should begin its strategic refresh shortly after midyear and complete the refresh before the end of the third quarter; immediately commence its long-term strategic financial plan once the refresh is completed; and then, when the long-term strategic plan is done, immediately turn to its budget for the upcoming year. For a company whose fiscal year matches the calendar year, the process would begin after midyear and finish in mid-December (exhibit). Across industries, CFOs of companies that have more compact timelines  report that they outperform their peers on numerous dimensions. 3 For more on the benefits of nimbler resource allocation processes, see the McKinsey Global Survey, “ Tying short-term decisions to long-term strategy ,” McKinsey, May 20, 2024.

6. Build in year-round resource allocation

Budgets are never perfect—which is exactly what one would expect, since circumstances change over the course of the year. For many companies, the approach to in-year flexibility is to allocate the resources to each division or unit leader and give them the decision rights to reallocate among lines they control, as they see fit. This, however, creates a perverse incentive for divisions or business units to hoard resources they don’t need, spend it on lower-priority items or, even worse, underinvest in strategic initiatives to meet short-term targets.

To prepare for inevitable changes in the number of resources needed and available during the year, the authority for meaningful flexibility in resource allocation should belong only to senior leaders, at the enterprise level. An investment committee , including the CEO and CFO (and ideally only one to three additional voting members, with the CEO making the deciding call) should meet monthly to make important in-year investment decisions. 4 For more on the governance of capital allocation, see Aaron De Smet and Tim Koller, “ Capital allocation starts with governance—and should be led by the CEO ,” McKinsey, June 22, 2023. These monthly meetings should be for decisions , not for progress updates or general reviews. The agenda should address only those matters that require a decision—and the result should never be “deciding to decide.” Key decisions that the committee may make during these meetings can involve allocating funds for stage-gated projects or projects that were provisionally approved during the annual planning process, discontinuing projects that aren’t likely to meet their objectives, and approving new projects that arose after the annual planning cycle.

Flexibility usually requires setting a reserve of unallocated funds that can be used during the year for new initiatives that were not anticipated during the planning process. Withdrawals from the reserve should be authorized only by the CEO or investment committee and must align with well-defined criteria, such as affirming that the release is for a strategically vital initiative or covering essential external costs, such as dealing with natural disasters. While there is no universally applicable percentage for the “right” amount to reserve, a general guideline is to set aside 5 to 20 percent of the corporation’s budget. For businesses operating in sectors with longer project lead times and minimal market volatility, such as utilities, a strategic reserve of about 5 percent of the budget may be sufficient. Conversely, industries characterized by rapid market changes and fluid resource allocation, like software, may find a reserve of approximately 20 percent more appropriate. Consumer-packaged-goods companies, for example, may encounter a newly launched campaign that fails to meet its targets or a competitor that launches a new product that senior leaders did not anticipate. As situations arise, the investment committee should reallocate resources quickly, opening up opportunities for other businesses and initiatives throughout the year.

Certain projects are easier to stage-gate during the formal planning cycle, such as pharmaceutical companies preparing to make significant investments in marketing once regulatory approvals are obtained. Other allocations of capital may be approved only provisionally because they require further analysis (for example, proof of concept for a new technology, or decisions to drill to a gas or petroleum deposit); in those cases, the investment committee should withhold that capital for in-year allocation. The key is to build in flexibility. An effective resource allocation process anticipates change and maintains at least a monthly cadence—and ideally, one that is more frequent than that.

The processes for turning strategy into action should be radically simple. The most effective processes clearly spell out the strategy and the role of each business in achieving that strategy, identify the most important value drivers, ensure that the most important initiatives have the resources they need, insist that the budget matches the first year of the long-term financial plan, keep to a compact planning schedule, and design and demonstrate in-year flexibility. After all, managing a large corporation is already complicated enough.

Tim Koller is a partner in McKinsey’s Denver office, and Zuzanna Kraszewska is an associate partner in the Warsaw office.

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Tying short-term decisions to long-term strategy

Where, how much, and how: Answering the hardest questions of resource allocation

Things may not be going to plan at Nusantara, the $35 billion capital city Indonesia is building from scratch

• Indonesia is building a new capital from scratch, with Jakarta threatened by rising sea levels.
• Two top officials resigned on Monday, raising questions about the $35 billion Nusantara project.
• Indonesia's government has used influencers and Tony Blair to help promote the grand project.

Indonesia's plans to build a new capital city from scratch have been hit by the unexpected resignation of the two top officials overseeing the project.

Bambang Susantono and his deputy Dhony Rahajoe both quit their roles at the Nusantara Capital City Authority on Monday, outlets including Reuters reported.

State Secretary Pratikno said President Joko Widodo had received Susantono's resignation, Asia News Network reported.

Related stories

They're expected to be temporarily replaced by two ministers from Widodo's government until permanent appointments are made.

Widodo said on Instagram that work on Nusantara would proceed "according to the shared vision," the South China Morning Post reported.

However, the resignations could be a setback for the new city being built on Borneo's eastern coast.

Indonesia's capital and largest city, Jakarta, faces flood risks due to rising sea levels, so Widodo's administration decided to build a replacement.

Nusantara will cost an estimated $35 billion and won't be finished until 2045. However, about 6,000 government workers are expected to move there in time for the new president's inauguration in October.

Indonesia's government has recruited high-profile figures, including former UK Prime Minister Tony Blair and Abu Dhabi's Crown Prince Mohammed bin Zayed Al Nahyan, to promote the project.

It's also tapped up influencers, with Widodo taking dozens of social media stars on a tour last year in a bid to address concerns about deforestation.

There are also rising concerns about how Nusantara will be funded. The Indonesian government has only committed to covering about 20% of the cost, and it's struggled to find other sources of cash. In March 2022, Japan's SoftBank pulled out of investing in the project.

Neither Susantono nor Rahajoe immediately responded to requests for comment from Reuters or Business Insider.

Watch: Filling Cambodian lakes with sand creates pricey new land. It also displaces families.

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• Capital Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 12, 2023

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Table of contents, what is capital planning.

Capital planning is a critical process that businesses undertake to allocate financial resources to long-term investments and projects, such as acquiring new equipment, launching new products, or expanding operations.

The primary aim of capital planning is to ensure that a company's investments generate the highest possible return, contribute to its long-term growth and success, and minimize financial risks.

A well-designed capital plan can help a company identify the most beneficial investment opportunities, create a balanced portfolio of projects, and allocate resources strategically.

Effective capital planning is crucial for a business's long-term success and financial stability.

It allows organizations to make strategic decisions about where to invest resources to achieve their growth objectives, maximize shareholder value, and maintain a competitive edge in the marketplace.

By carefully evaluating potential investments, companies can ensure that they are putting their money into projects that align with their overall strategy and have the potential to deliver significant returns.

Furthermore, capital planning helps businesses minimize investment risks by identifying potential threats and developing strategies to mitigate them.

Capital Planning Process

Identifying capital needs.

This step involves assessing a company’s current assets , forecasting future growth, and analyzing industry trends.

It includes evaluating the organization's existing infrastructure, equipment, and technology to determine if they are adequate to meet its short and long-term objectives.

Additionally, companies should assess their growth potential by analyzing market trends, customer demand, and competition to identify areas where investment may be required.

Forecasting future growth is critical to identifying capital needs, as it provides valuable insights into the company's potential revenue streams and resource requirements.

Companies should utilize historical data, market research, and industry analysis to create accurate growth projections.

Understanding industry trends is essential for identifying opportunities for investment and potential challenges that may impact the organization's financial performance.

Evaluating Capital Projects

Evaluating a company’s potential capital projects is done to determine their financial feasibility, strategic alignment, and associated risks. Financial feasibility refers to the project's ability to generate a return on investment (ROI) that exceeds its cost of capital .

This can be assessed using various capital budgeting techniques , such as net present value (NPV) , internal rate of return (IRR) , and payback period.

Strategic alignment is essential in the evaluation process, as it ensures that the proposed project aligns with the company's overall business strategy and objectives.

This may involve analyzing the project's potential impact on market share , competitive positioning, and long-term growth potential.

Risk assessment is another critical aspect of project evaluation, as it involves identifying potential risks associated with the investment and developing strategies to mitigate them.

Prioritizing Capital Investments

This involves ranking projects according to their potential for financial return, considering factors such as projected cash flows, payback period, and NPV. Balancing risk and reward is also a critical aspect of prioritizing investments.

Companies should aim to create a balanced portfolio of projects that offers an optimal mix of potential returns and risk exposure.

Resource availability is another important factor to consider when prioritizing capital investments.

Companies must ensure they have the financial, human, and technological resources to support the successful implementation of their chosen projects. This may require reallocating resources from other business areas or seeking external financing to fund the investment.

Budgeting Techniques for Capital Planning

Payback period.

The payback period is a simple capital budgeting technique that calculates the amount of time it takes for an investment to recoup its initial cost through cash inflows.

It is calculated by dividing the initial investment cost by the annual cash inflow generated by the project.

The payback period is useful for comparing investment options with similar risk profiles , as it provides a straightforward measure of how quickly an investment will start generating positive returns.

However, the payback period must account for the time value of money or cash flows generated after the initial investment has been recouped, which may limit its usefulness in evaluating long-term projects.

Net Present Value

NPV is a more sophisticated capital budgeting technique that accounts for the time value of money by discounting future cash flows to their present value.

The NPV is calculated by subtracting the present value of cash outflows (initial investment) from the present value of cash inflows generated by the project over its life.

A positive NPV indicates that the project is expected to generate a return greater than the cost of capital, making it a potentially worthwhile investment.

In contrast, a negative NPV suggests that the project's returns are unlikely to cover its costs. NPV is widely used by businesses to compare investment opportunities and determine their financial viability.

Internal Rate of Return

The IRR calculates the discount rate at which the net present value of a project's cash flows becomes zero. In other words, the IRR represents the annualized rate of return at which the investment breaks even.

The IRR can be used to compare the profitability of different investment options, with higher IRRs generally indicating more attractive opportunities.

It is important to note that the IRR assumes that all future cash flows are reinvested at the same rate, which may only sometimes be the case in practice.

Profitability Index (PI)

The profitability index measures the relative profitability of an investment by dividing the present value of its future cash flows by the initial investment cost.

A PI greater than 1 indicates that the project is expected to generate a positive net present value. In contrast, a PI of less than 1 suggests that the investment may not be financially viable.

The PI is useful for comparing the relative profitability of different investment options, as it takes into account both the size of the investment and the potential returns.

Modified Internal Rate of Return (MIRR)

The modified internal rate of return (MIRR) is a variation of the IRR that addresses some of its limitations by considering the cost of capital and the reinvestment rate of cash flows separately.

The MIRR calculates the annualized rate of return at which the present value of a project's cash inflows, discounted at the reinvestment rate, equals the present value of its cash outflows, discounted at the cost of capital.

The MIRR provides a more realistic measure of a project's profitability, accounting for the actual reinvestment opportunities available to the company.

Risk Management in Capital Planning

Risk identification and assessment.

Risk management is a critical aspect of capital planning, as it helps businesses identify and assess potential risks associated with their investments.

This involves analyzing various factors, such as market conditions, economic trends, competitive dynamics, and regulatory developments, to determine the likelihood and potential impact of various risks on the company's financial performance.

Risk assessment should be an ongoing process, as new risks may emerge over time, or existing risks may change in magnitude or probability.

Risk Mitigation Strategies

Once risks have been identified and assessed, businesses should develop strategies to mitigate their potential impact on capital investments. This can involve a range of approaches, such as diversification, hedging , and insurance.

Diversification is spreading investments across a range of projects or asset classes to reduce the portfolio's overall risk exposure. Hedging involves using financial instruments, such as options or futures contracts , to offset potential losses from an investment.

Insurance can be used to transfer certain types of risk to a third party, such as property and casualty insurers or credit risk insurers, in exchange for a premium.

Contingency Planning

Contingency planning is an essential component of risk management. It involves developing alternative plans or strategies to address potential risks that may materialize during a capital investment.

This can include identifying backup suppliers or contractors, establishing alternative financing arrangements, or developing plans to scale back or modify the project if necessary.

Contingency planning helps businesses to be better prepared for unexpected events and to minimize the potential impact of risks on their capital investments.

Capital Planning Best Practices

Involving stakeholders.

One of the best practices in capital planning is involving all relevant stakeholders in the process. This includes the company's management and financial teams and employees, shareholders, customers, and suppliers.

By engaging stakeholders in the planning process, businesses can gain valuable insights, identify potential risks and opportunities, and build a shared understanding of the company's strategic objectives and investment priorities.

Aligning With Overall Business Strategy

Capital planning should be closely aligned with a company's overall business strategy, ensuring investments are directed toward projects supporting the organization's long-term goals and objectives.

To achieve this alignment, businesses should regularly review and update their strategic plans and ensure that capital planning is integral to their strategic decision-making process.

Regularly Reviewing and Updating the Plan

Capital planning is an ongoing process that requires regular review and updating to reflect changes in the company's financial position, market conditions, and strategic priorities.

By periodically revisiting their capital plan, businesses can ensure that their investment decisions remain aligned with their objectives, respond to new opportunities or risks, and adapt to changing circumstances.

Ensuring Transparency and Accountability

Transparency and accountability are essential for effective capital planning, as they help build trust among stakeholders and ensure that investment decisions are made in the company's best interests.

Businesses should establish clear processes for evaluating and prioritizing capital projects, involve stakeholders in decision-making, and regularly report on the progress and outcomes of their investments.

Capital planning is an essential process that drives a company's long-term growth and financial success.

It involves identifying capital needs by assessing current assets and forecasting future growth, evaluating potential investments using capital budgeting techniques like NPV and IRR, and prioritizing projects based on expected returns , risks, and resource availability.

Effective capital planning also incorporates risk management strategies, such as risk identification, mitigation, and contingency planning, to minimize potential investment threats.

Adhering to best practices, such as involving stakeholders, aligning capital planning with overall business strategy, regularly reviewing and updating plans, and ensuring transparency and accountability, further enhances the effectiveness of capital planning.

By adopting a comprehensive and strategic approach to capital planning, businesses can maximize shareholder value and secure long-term success in a competitive market.

Capital Planning FAQs

What is capital planning.

Capital planning is the process of determining how an organization will allocate and invest its financial resources to fund long-term projects, acquisitions, or expansions.

Why is capital planning important?

Capital planning is essential because it helps organizations prioritize and make informed decisions about allocating funds to projects that will generate the most significant returns or strategic advantages.

How does capital planning support financial stability?

Capital planning helps organizations maintain financial stability by ensuring that sufficient funds are available for strategic investments, managing debt and equity ratios, and minimizing the risk of financial distress.

What role does risk assessment play in capital planning?

Risk assessment is a crucial component of capital planning as it helps identify potential risks associated with investment projects. By evaluating risks, organizations can make informed decisions, develop mitigation strategies, and allocate resources more effectively.

How often should capital planning be reviewed and updated?

Capital planning should be reviewed and updated regularly to account for changes in market conditions, business priorities, and financial goals. Typically, organizations conduct annual or periodic reviews to ensure the relevance and accuracy of their capital plans.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Carvana Provides Updates on Operating Plan and Capital Structure at Growth Conference

Carvana Co. (NYSE: CVNA), the leading e-commerce platform for buying and selling used cars, presented today at the William Blair 44th Annual Growth Stock Conference, sharing progress and updates, including:

Operating Plan One year ago, Carvana launched an internal plan that identified opportunities to strengthen unit economics over a 12-month period. This effort drove progress across every team, resulting in:

• Efficiency-driven growth. Despite continued focus on profitability initiatives and unit economics, Carvana grew retail units by 16% YoY in Q1, driven in part by improvements in conversion and customer experience.
• Substantial YoY improvements in unit economics . In Q1, non-GAAP GPU increased 42%, non-GAAP SG&A per unit decreased 17%, and Adjusted EBITDA Margin increased 860 bps.
• Industry-leading Adjusted EBITDA margin. In Q1, Carvana delivered its best financial results in company history, driving industry-leading 7.7% Adjusted EBITDA margin and reaching its goal of becoming the most profitable auto retailer for the first time by this measure.
• Significant cash flow progress. Adjusted EBITDA in Q1 was $235 million while capital expenditures and non-PIK interest expense was only $48 million.
• Further momentum in Q2. The company reiterated its expectation of a sequential increase in its YoY growth rate in retail units and a sequential increase in Adjusted EBITDA in Q2.

Carvana is now rolling out its next 12-month plan, including setting new, ambitious targets for each of its teams with the goal of driving additional material gains across every component of the business.

Capital Structure Carvana’s strong Adjusted EBITDA provides significant financial flexibility that allows the company to de-lever over time. The company previously announced its intention to pay cash interest on 2028 and 2030 Senior Secured Notes for interest payments beginning in 2025. In Q2, Carvana repurchased $250 million (or ~24%) of 2028 Senior Secured Notes and raised $350 million of equity capital through its at-the-market (ATM) program.

Carvana expects these combined actions to lead to ~$55 million of interest expense savings in 2026 and $620 million less debt outstanding at year-end 2026. Beyond these steps, the company plans to continue to reduce leverage over time.

Carvana’s full presentation can be found by accessing the events and presentations page of the company’s Investor Relations website.

Forward-Looking Statements.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Carvana’s current expectations and projections with respect to, among other things, its financial condition, results of operations and future performance. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “can,” “could,” “may,” “should,” “would,” “will,” the negatives thereof and other words and terms of similar meaning.

Forward-looking statements include all statements that are not historical facts, including expectations regarding forecasted results and financial and operational goals. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Among these factors are risks related to: the larger automotive ecosystem, including consumer demand, global supply chain challenges, and other macroeconomic issues; our substantial indebtedness; our history of losses and ability to maintain profitability in the future; the seasonal and other fluctuations in our quarterly operating results; the highly competitive industry in which we participate; the changes in prices of new and used vehicles; and the other risks identified under the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

There is no assurance that any forward-looking statements will materialize. You are cautioned not to place undue reliance on forward-looking statements, which reflect expectations only as of this date. Carvana does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.

Use of Non-GAAP Financial Measures

To supplement the consolidated financial measures, which are prepared and presented in accordance with GAAP, we also refer to the following Non-GAAP measures in this press release: Adjusted EBITDA, Adjusted EBITDA Margin, Gross Profit, non-GAAP, Total gross profit per retail unit, non-GAAP, SG&A Expenses, non-GAAP, and Total SG&A expenses per retail unit, non-GAAP.

Adjusted EBITDA is defined as net income (loss) plus income tax provision (benefit), interest expense, other operating expense (income), net, other expense (income), net, depreciation and amortization expense in cost of sales and SG&A, goodwill impairment, share-based compensation expense in cost of sales and SG&A, and restructuring expense in cost of sales and SG&A expenses, minus revenue related to our Root Warrants and gain on debt extinguishment.

Gross profit, non-GAAP is defined as GAAP gross profit plus depreciation and amortization expense in cost of sales, share-based compensation expense in cost of sales, and restructuring expense in cost of sales, minus revenue related to our Root Warrants. Total gross profit per retail unit, non-GAAP is Gross profit, non-GAAP divided by retail vehicle unit sales.

SG&A expenses, non-GAAP is defined as GAAP SG&A expenses minus depreciation and amortization expense in SG&A expenses, share-based compensation expense in SG&A expenses, and restructuring expense in SG&A expenses. Total SG&A expenses per retail unit, non-GAAP is SG&A expenses, non-GAAP divided by retail vehicle unit sales.

We believe that this metric is useful to us and to our investors because it excludes certain financial, capital structure, and non-cash items that we do not believe directly reflect our core operations and may not be indicative of our recurring operations, in part because they may vary widely across time and within our industry independent of the performance of our core operations. We believe that excluding these items enables us to more effectively evaluate our performance period-over-period and relative to our competitors.

About Carvana

Carvana’s mission is to change the way people buy and sell cars. Over the past decade, Carvana has revolutionized automotive retail and delighted millions of customers with an offering that is fun, fast, and fair. With Carvana, customers can choose from tens of thousands of vehicles, get financing, trade-in, and complete a purchase entirely online with the convenience of home delivery or local pick up in over 300 U.S. markets. Carvana’s vertically integrated platform is powered by its passionate team, unique national infrastructure, and purpose-built technology. Carvana is a Fortune 500 company and is proud to be recognized by Forbes as one of America’s Best Employers.

For more information, please visit www.carvana.com .

Investors Mike McKeever [email protected]

Media [email protected]

View source version on businesswire.com: https://www.businesswire.com/news/home/20240606129576/en/

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US lawmakers call to add China's CATL, Gotion to import ban list, WSJ reports

Chinese battery companies CATL and Gotion High Tech should be added immediately to a U.S. import ban list, a group of Republican lawmakers said, alleging their supply chains use forced labour, the Wall Street Journal reported.

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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.

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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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A new national stock exchange could be coming to Texas. Here's what we know.

Capital giants BlackRock and Citadel are among the headline investors in a group that is seeking to bring a new national stock exchange to the Lone Star State. 

James H Lee, chairman and CEO of Texas Stock Exchange, says the group leading the project has already raised $120 million. 

“With the demand we are seeing from investors and corporations for expanded alternatives to trade and list equities, this is an opportune time to build a major, national exchange in Texas,” Lee said via LinkedIn. 

The Texas Stock Exchange would be headquartered in Dallas, a finance powerhouse in the state, and Lee said that the project already has more than two dozen investors. 

On Wednesday, the TXSE group announced its intent to seek registration with the U.S. Securities and Exchange Commission. TXSE would focus on enabling U.S. and global companies to access U.S. equity capital markets and would provide a venue to trade and list public companies and the growing universe of exchange-traded products.

"TXSE will ultimately create more competition around quote activity, liquidity and transparency, resulting in more consistent and reliable markets that benefit investors, global issuers and liquidity providers alike,” Lee said in a news release. 

Why was Texas chosen as the site of the new stock exchange?

Texas was chosen as the site of the new stock exchange because of its blistering economic growth and because of the economic growth of states surrounding it. 

A news release from TXSE also pointed out that Texas is home to more Fortune 500 companies than any other state and more than 5,200 private equity sponsored companies. In addition, there are more than 1,500 publicly traded companies throughout the southeastern quadrant of the U.S. Investors in the new exchange are hoping to capitalize on the many companies that are preparing to access the public markets.

Beck Andrew Salgado covers trending topics in the Austin business ecosystem for the American-Statesman . To share additional tips or insights with Salgado , email [email protected].

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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