Learn the Lingo Used in Business Planning
Here are some terms that are good to know the meaning of when creating your business plan.
Business Plan
This document outlines the future goals for your business. The plan should explain the details of the what, why, who, and how of the proposed business opportunity. It should include a financial projection that shows the amount of money required to carry out the plan, the probable sources of the required funds, and the likely financial results if the plan is implemented.
Break-Even Analysis
This calculation shows the amount of sales revenue required to earn zero profit. That amount of sales is also called the break-even point. A higher level of sales will lead to a profit for the business.
Payback Period
This is the amount of time it takes for an investment in the business to be repaid. It’s considered the break-even point of an investment. While the payback period can be quick to calculate, it disregards the time value of money, unlike the return on investment. A shorter payback period represents a better deal for the investor.
Return on Investment
The ROI measures the profitability of the business in relation to the investment of both equity and debt required to earn it. It’s calculated by dividing the annual income of the business by the investment. The higher the ROI the better.
Marketing Plan
This document outlines the future sales objectives for the business and the actions proposed to achieve those goals. The plan should explain the details of the how, where, and to whom a business will sell its products or services. The marketing plan may be a stand-alone document. However, the marketing plan or a summary of it is often incorporated into a business plan.
Business Model
The business model explains how the business will generate revenue and shows the expenditures required to earn that revenue. It should show how the business is capable of earning a return on the investment of the owners. In a nutshell, the business model should demonstrate the economic viability of the business. An explanation of the business model should be incorporated into a business plan.
Financial Projection
Typically the financial projection will show the likely future financial results of the business. A projection will usually cover the next five years. The first year or two will show results on a month-by-month basis, while later years show only annual estimates. At a bare minimum, the financial projection will show details of future cash flow. An integrated financial projection will also show future income and expenses and balance sheets.
Template
A template is a model document or form that includes standard section headings, text, and calculation formulae along with blank sections that must be completed. Use of a template can save time and ensure that all the required information is included in the completed document.
