It might be stating the obvious, but planning and preparation are keys to success in business.
After all, entrepreneurs put in hard work to develop their product, understand the market they plan to serve, assess their competitive landscape and funding needs, and much more.
Successful business owners also take time to document their strategies for guiding the growth of their companies. They use these strategies to take advantage of new opportunities and pivot away from threats.
Two common frameworks for documenting strategies – the business model canvas and the business plan – are also among the easiest to get confused.
Though they can complement each other, a business model canvas and a business plan are different in ways worth understanding for any entrepreneur who’s refining their business concept and strategy.
Let’s start by digging deeper into what a business model canvas is.
What is a business model canvas?
You may have heard the term “business model” before. Every company has one.
Your business model is just a description of how your business will generate revenue. In other words, it’s a snapshot of the ways your business will be profitable.
Writing a business plan is one way of explaining a company’s business model. The business model canvas takes a different approach.
A business model canvas is a one-page template that explains your business model and provides an overview of your:
Relationships with key partners
While the business model is a statement of fact, the business model canvas is a strategic process—a method for either documenting or determining your business model.
It’s meant to be quickly and easily updated as a business better understands what it needs to be successful over time. This makes it especially useful for startups and newer businesses that are still trying to determine their business model.
You can think of a business model canvas as a condensed, summarized, and simplified version of a business plan. It’s a great way to quickly document an idea and get started on the planning process.
The business plan is a way to expand on the ideas from the canvas and flesh out more details on strategy and implementation.
To get a better sense of how a business model canvas documents business strategy, consider a company like Netflix. The streaming company’s business model is based on generating subscription revenue through its content library and exclusive content.
If Netflix executives were to create a business model canvas, it would map out how the company leverages key resources, partnerships, and activities to achieve its value proposition and drive profitability. The business model is the destination.
The great thing about a business model canvas is that you can quickly document business ideas and see how a business might work at a high level. As you do more research, you’ll quickly refine your canvas until you have a business idea you think will work.
From there, you expand into a full business plan.
What is a business plan?
If a business model canvas captures what a company looks like when it’s operating successfully, then a business plan is a more detailed version along with a company’s blueprint for getting there.
Think of your business plan as a process of laying out your goals and your strategies for achieving them.
The business plan is more detailed, and changes over time. It examines each aspect of your business, from operations to marketing and financials.
The plan often includes forward-looking forecasts of a company’s projected financial performance. These are always educated guesses. But these forecasts can also be used as a management tool for any growing business.
A business plan is also a must for companies hoping to receive a bank loan, SBA loan, or other form of outside investment. Anyone putting up funds to help you grow will want to see you’ve done your homework.
So a business plan is how you not only prepare yourself, but also show your audience that you’re prepared.
Components of a business plan
While there are several different types of business plans meant for different uses, well-written plans will cover these common areas:
Products and services: Detailed descriptions of what you’re selling and how it fills a need in the market.
Market analysis: Assessing the size of your market, and information about your customers such as demographics (age, income level) and psychographics (interests, values).
Competitive analysis: Documenting existing businesses and solutions your target customers are finding in the market.
Marketing and sales plan: Your strategies for positioning your product or service in the market, and developing a customer base.
Operations plan: Describing how you will run the business from day to day, including how you will manage inventory, equipment, and staff.
Organization and management team: Detailing the legal structure of the business, as well as key members, their backgrounds and qualifications.
Financial Plans: Business financials that measure a company’s performance and health, including profit & loss statements, cash flow statements and balance sheets. Effective financial plans also include forward-looking sales forecasts and expense budgets.
How a business plan and business model canvas inform business strategy
Avoid the trap of using the two terms interchangeably. As we’ve shown, the two have different focuses and purposes.
The business model canvas (or our one-page plan template) is a great starting point for mapping out your initial strategy. Both are easy to iterate on as you test ideas and determine what’s feasible.
Once you have a clearer sense of your idea, you can expand the canvas or one-page plan into a business plan that digs into details like your operations plan, marketing strategy, and financial forecast.
When you understand how – and when – to use each, you can speed up the entire planning process. That’s because the business model canvas lays out the foundation of your venture’s feasibility and potential, while the business plan provides a roadmap for getting there.
The work of business planning is about connecting the dots between the potential and the process.
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Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning.
He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.