A business plan is essentially a budget for a business. It estimates revenues, costs and expenses for a specified period and budgets them to arrive at a target profit number. The business plan is an essential tool in managing a business and especially in justifying financing for new investment.
When new financing is sought, the business plan works out what new revenue can be expected from the investment, how long it will take to recover the expenditure with increased profits, and ultimately return on investment for the new business.
For a start-up business, the business plan estimates the costs to begin the business, to develop the needed technology, write the necessary software, and/or manufacture the product. Then the costs to develop a market and sell the product or service must be estimated. What price will the market support? How many must be sold to break even? Will additional capital be necessary? At what timing? When will the business break even? When will it become profitable? How will investors be repaid and rewarded?
A well thought out business plan makes investors more comfortable financing a new investment.