Business Plan Vs. Business Model
Small businesses provide profitable opportunities for many people. These profits attract many to attack this adventure. However, those who are looking to travel this path need to know some important terms and concepts in this new adventure. A good business model with a good business plan can ensure success. A poor business model with a poor business plan can ensure months and even years of misery.
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History
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Business plans have existed for centuries. Anytime a business person wanted to expand and had a need for equity or debt financing, he needed a medium in which to communicate about his business to the individual providing the financing. Business models really originated in the past century as publicly traded companies emerged, as the availability of public information about these companies emerged and as the study of efficient use of capital moved to the forefront in both business and economics.
Significance
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The business plan, which demonstrates how the business intends to succeed and grow, is the key component in raising financing. This key component can influence the ability of the business owner to obtain the desired financing. A business model reflects the structure of the business and how it is currently built. A flawed business model creates much difficulty for the business owner even with the greatest of efforts, while a superior business model can produce profits with negligible efforts.
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Function
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The business plan has emerged as the key component in raising financing for a business as it communicates how the business will generate profits and succeed. Many times a potential business owner cannot obtain financing without the business plan. The business model focuses on the architecture of the business and how the structure creates value. When investing in a business, one should examine the business model to understand the potential for superior profitability.
Features
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A business plan will include components such as an executive summary, company analysis, industry analysis, analysis of customers or demographic trends, and analysis of competition. A business model will have components including market segment, revenue generation and margins, and competitive strategy.
Misconceptions
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Many will conclude that the business plan and the business model are synonyms; however, the two concepts serve entirely different purposes and contain different studies or reports. While a bank may take into account the business model before loaning money to a business, the bank will closely examine the business plan and the business owner to provide insight into the risk of the loan. The business model deals with the architecture of the business. Typically, most business models within an industry are similar. For example, the business models of most software companies would include very little debt financing, high gross margins and operating margins, and low barriers to entry.
Benefits
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A well-written business plan about a well-thought-out business can yield financing offers to ensure a strong start for a business. Also, a well-thought-out business plan suggests that the business owner has taken much time in planning the strategy of the business to ensure success. A strong business model can produce above average economic returns for the business owners. Some investors just examine the competitive environment or the management team, but having a strong business model will pay dividends during the down times.
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