The importance of the business plan for investors

The importance of the business plan for investors

The business plan is today an essential tool for the life of a company. It is in fact essential both for entrepreneurs, to whom it provides guidelines to follow as well as an indication of the budget, and for investors interested in injecting capital into the company. But let’s first try to understand what this document consists of and what it is made up of.

What is the business plan?

The business plan summarizes the main characteristics of an entrepreneurial project and describes in detail how a company, usually in the startup phase, defines its growth objectives and establishes a roadmap with concrete actions to achieve them from an operational, financial and of marketing.

It can be said that it consists of a medium-long term simulation tool for company dynamics and project validation. Once the feasibility of the idea has been decreed, the business plan is in fact used as an information support to be presented to third parties to assess the potential of the business and the associated risks.

How is it composed?

A good business plan should include a description of the project and business processes including marketing, logistical and managerial aspects, an investment and / or financing plan and the definition of the necessary skills and human resources.

It usually consists of 2 parts:

· A first descriptive and qualitative part in which the entrepreneurial project is explained and the key characteristics of the products and services are analyzed. The competitive market in which the company is located is also contextualized, as well as the competitive advantages that could be achieved compared to other players in the market. Finally, the resources needed to achieve the objectives of the plan and the entrepreneurial team are described.

· The second numerical part presents the economic-financial projections taken into consideration in the descriptive part usually over a period of time ranging from 5 to 7 years. The idea is presented in numbers through the business hypotheses that are validated and a forecast plan of investments, loans, financial flows and growth forecasts.

There is no right or wrong way to write a business plan, but every company must find the one that meets its needs to touch on the key points described above.

What are the functions of the business plan?

The business plan is used both internally and externally.

For an internal audience, the document is useful for the Management Team to define the sustainability of the business, the potential for market penetration and then ensure that it is in line with the strategy with respect to what has been set. Although particularly useful for new businesses, every company should take care to draw up one and periodically review and update it to discuss long-term objectives and their evolution over time.

As far as external communication is concerned, the business plan is essential for attracting investments from third parties or securing a loan, particularly when the project has not yet established a proven track record. In fact, it makes it possible to inform potential investors about the results that a company intends to achieve, the actions and strategies to be implemented and the necessary financing objectives.

Why is the business plan important to investors?

The business plan is often presented to new potential shareholders for the request for capital account financing (Equity Investors) or debt financial institutions (Debt Investors).

By consulting a business plan, the potential equity investor will be able to understand his future return from the investment and the share of equity sold against the economic contribution, estimate the financial needs of the company in the medium to long term and calculate the dilution of its shares. over time in the event of subsequent capital increases. A debt investor, on the other hand, will be able to ascertain the ability to collect the debt installments for the time frame established by the loan agreement.

To conclude, a business plan can have different functions depending on the interlocutor and the status in which the company finds itself at the time of drafting (startup, existing or expanding company). In fact, it can play the role of an internal planning or management tool, of verifying the objectives and targets set, of analyzing the attractiveness and criticality for outsiders or as a monitoring tool.

In short, if drawn up in a coherent, clear and comprehensive way, it will facilitate both investors and entrepreneurs in making sure they invest time and money in a successful business.

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