Business plans: two major types.

Increasingly, small business owners are being encouraged to develop business plans for their firms. Many small firms report, however, that effective planning is the most difficult function they have to perform. The time and resources invested in preparing

business plans can yield substantial returns. For example, the benefits of planning may include the determination of the unique nature of the business, an objective analysis of the competition, and the development and specification of goals, objectives, and supporting strategies. Even more important, research evidence suggests that planning can facilitate small firm performance and success. Yet the evidence is far from conclusive. It may well be that the process of planning, which involves a careful analysis of the firm and its environment, is just as important as the plan itself.

One problem with discussing plans and planning is distinguishing among the various types of plans. Strategic plans outline the actions necessary to achieve long-range goals. Tactical, or operating plans focus on the short-run, usually one year. Functional plans specify short- to medium-range actions having to do with specific aspects of the business, such as marketing, finance, manufacturing, or personnel. (These tend to differ somewhat from the general "policies" which guide day-to-day action.) Another type of plan is the investment plan, used by small business owners to gain access to financing from banks, the SBA, or venture capitalists.

Planning models have focused largely on the creation and the benefits of operational or working plans. In practice, however, many small business owners devote substantial efforts toward developing financial plans. The financial, or investment plan differs significantly from the preceding types of plans, which are collectively referred to as working plans. The investment plan is designed for the sole purpose of obtaining financing, whereas working plans are designed to guide and control actual business operations. Both types of plans are important, and in many instances the success of one may hinge at least in part on the success of the other.

Small business owners or potential entrepreneurs should be aware of the critical differences between working and investment plans. For example, when a speaker, consultant, government official, or financial advisor suggests that a business plan be developed, the owner may misinterpret what is expected. Further, although the development of any type of plan can be useful, neither type of plan will effectively serve the purpose of the other. This article explores the differences between investment plans and working business plans.