What is a business plan and why write one?
A business plan is a written plan for a new or growing business. It says what the business will sell, to whom, how, and how the money will work.
Why do owners write one?
- To think clearly. Writing things down shows gaps in the idea.
- To reduce risk. Problems are spotted on paper, before money is lost.
- To get money. Banks and investors want to see a plan before they lend or invest.
- To set targets. The plan gives goals, so the owner can check progress later.
A plan is not a promise. It is a careful guess. It has limits: the future may change, and owners may be too hopeful about sales.
The main sections of a business plan
- Executive summary: the whole plan on one page. Written last, read first.
- Business idea and aims: the product or service and the goals (for example, sell 600 units in year one).
- Market research: who the customers are and how many there are.
- Competitors: who else sells something similar, and what makes this business different (its unique selling point).
- Marketing plan: the 4 Ps: product, price, place, promotion.
- Operations and team: location, suppliers, equipment, staff, legal form and licences.
- Finance: start-up costs, sources of money, cost and revenue forecasts, cash-flow forecast and break-even.
Good plans also think about the environment and ethics: waste, fair pay, honest advertising.
Costs, revenue and profit
Fixed costs do not change when output changes: rent, insurance, a manager's salary.
Variable costs change with each unit made: ingredients, packaging, delivery.
Total cost = fixed costs + (variable cost per unit × units).
Revenue (sales income) = price × units sold.
Profit = revenue − total cost. If the answer is negative, it is a loss.
Example
Rent ₹2000, ₹20 per cup, price ₹60, 30 cups sold. Revenue = ₹1800. Total cost = 2000 + 600 = ₹2600. Loss = ₹800.
Break-even and using the plan
The break-even point is the number of units where revenue = total cost. There is no profit and no loss.
Break-even units = fixed costs ÷ (price − variable cost per unit).
The bottom part, price − variable cost, is called the contribution per unit. Each sale gives this much towards paying the fixed costs.
Example: 2000 ÷ (60 − 20) = 50 cups. Sell 51 or more and the stall makes a profit.
Try it
Pick a small business you could run (bracelets, tutoring, cookies). Write its fixed cost, variable cost per unit and price. Work out the break-even. Then set the same numbers in the 3D model and check.
Key formulas and definitions
- Total cost = fixed cost + variable cost per unit × units
- Revenue = price × units sold
- Profit = revenue − total cost
- Contribution per unit = price − variable cost per unit
- Break-even units = fixed costs ÷ contribution per unit
Worked examples
1. A bakery pays €900 rent a month. Each cake costs €4 to make and sells for €10. What is the break-even output?
Contribution = 10 − 4 = €6. Break-even = 900 ÷ 6 = 150 cakes a month.
2. A T-shirt seller has fixed costs of $1500, variable cost $5 per shirt, price $15. She sells 200 shirts. Find revenue, total cost and profit.
Revenue = 15 × 200 = $3000. Total cost = 1500 + 5 × 200 = $2500. Profit = 3000 − 2500 = $500.
3. A tutor plans to rent a room for ₹6000 a month. Printing costs ₹50 per student and the fee is ₹650. How many students are needed to break even, and what profit is made with 15 students?
Contribution = 650 − 50 = ₹600. Break-even = 6000 ÷ 600 = 10 students. With 15: revenue = ₹9750, total cost = 6000 + 750 = ₹6750, profit = ₹3000 (5 students above break-even × ₹600).
Common mistakes
- Mixing up fixed and variable costs. Ask: does this cost change if I sell one more unit?
- Using price instead of contribution in the break-even formula. Divide by (price − variable cost).
- Thinking revenue is the same as profit. Revenue is all the money coming in; profit is what is left after costs.
- Treating the plan as finished forever. A plan must be checked against real results and updated.