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There are four basic financial reporting principles governed by generally accepted accounting principles (GAAP). These principles are designed to provide consistency and set standards throughout the financial reporting field. If you wish to be compliant with GAAP, the cost principle should be used.

The cost principle maintains that the cost of an asset must be recorded at historical cost, or its original cost and should not be recorded at fair market value. We’ll explain in greater detail just what the cost principle is and how it may impact your business.

Overview: What is the cost principle?

Even if you’re an accounting newbie, you know the importance of assets. Assets are anything of value that your business owns. Because they are so important to your business, it’s essential to record and report their value accurately and consistently, a relatively easy process if you’re using accounting software .

But whatever process you’re using to record your assets, the cost principle can help maintain consistent balance sheet reporting.

The cost principle, also known as the historical cost principle states that assets should be recorded at their original cost, rather than their current market value.

This is because, in many cases, the cost of an item is subjective and dependent on market conditions. For example, an asset you purchased a year ago may suddenly gain value for a variety of reasons. Maybe the manufacturer stopped making that particular item, or the item has become scarce.

Maybe it has become extraordinarily popular. Whatever the reason, the cost principle maintains that the asset value remains the same as its original, or purchase, cost regardless of later changes in market value.

The cost principle has little impact on current assets like your bank account; they are short-term assets with little opportunity to gain any value. However, assets such as equipment and machinery should be recorded at face value and remain on the balance sheet at their original cost.

Are there exceptions to the cost principle?

There are some exceptions to the cost principle, mainly regarding liquid assets such as debt or equity investments. Investments that will be converted to cash in the near future are shown on your balance sheet at their market value, rather than their historical cost.

The other exception is accounts receivable, which should be displayed on your balance sheet at their net realizable balance, which is the balance that you expect to receive when the accounts receivable balances are paid.

Examples of the cost principle

These examples may help you better understand the cost principle in action.

Cost principle: Example 1

Jim started his business in 2008, constructing a building to house his growing staff. The cost to construct the building was $300,000, but by 2020, the fair market value of the building had increased to $1.1 million. However, on Jim’s balance sheet, the cost of the building remains at $300,000.

Cost principle: Example 2

Laura purchased a piece of machinery for her small manufacturing plant in 2017 at a cost of $20,000. Today, Laura’s machinery is worth only $8,000, but it is still recorded on her balance sheet at the original cost, less the accumulated depreciation of $12,000 that has been recorded in the three years since its purchase.

The balance sheet displays the office equipment balance and the accumulated depreciation. Image source: Author

Source: AccountingCoach.com.

Cost principle: Example 3

Scott’s music production company purchases the copyright to a song from an up-and-coming artist. Scott should record the newly purchased asset at the cost he paid to purchase the copyright. Because copyright is an intangible asset, the copyright cost should be amortized, rather than depreciated.

Should you be using the cost principle?

If you currently use accrual accounting in your business and wish to be GAAP compliant, you should be using the cost principle. Since publicly owned companies are required to be GAAP compliant, they should be using the historical cost principle as well.

There are some benefits -- and a few drawbacks -- to using the cost principle, which we’ll examine next.

Benefit of using the cost principle

• Your balance sheet is consistent: Using historical cost principle ensures that your balance sheet is consistent from period to period. This is even more important when sharing that balance sheet with outside entities, such as investors and lenders.
• You can verify costs: One of the most important aspects of accounting is verification. For every transaction you make in your accounting software or your manual ledgers, there should be an originating document that verifies that entry. In other words, if there is ever a question about the assets on your books, you’ll have the original sales document with the cost of the asset available.
• There are no adjustments needed: As long as you consistently handle all your assets using the cost principle, costs will not change, always ensuring that your financial statements are accurate and not based on fluctuating fair values.

It’s important to understand the difference between the historical cost and fair value of your assets and when to use which figure. Image source: Author

Source: WallStreeMojo.com.

Drawbacks of using the cost principle

While it’s clear that using the cost principle has its advantages, there are also a few downsides as well. For instance, if your business has valuable logos or brands, they would not be reported on your balance sheet.

There is an exception for intangible assets purchased from another business. Issues can also arise when selling an asset, since it would likely be sold at fair market value, not historical cost.

Finally, the value of your company may be seriously undervalued based on the historical cost of assets, which can directly affect your credit rating, your ability to obtain a loan, or even your ability to sell the business.

Let’s say you decide to purchase a computer monitor. You have a particular brand and size in mind, so you visit various stores looking for the monitor. During this process, you realize that the exact same monitor varies in pricing from store to store. So how do you determine its fair market value?

What the historical cost principle does is ensure that you record the asset you’ve purchased at its original cost, rather than what the market value. Fair market value will always change, the original cost of the asset will not.

Yes. Using the cost principle will record the asset cost at its original cost, but you will still have to depreciate the asset, as in most cases it will continue to lose value, or depreciate.

Any highly liquid assets you purchase should be recorded at fair market value rather than historical cost. Financial investments that your business makes should also be recorded at fair market value and adjusted after each accounting period to reflect the most current value.

The cost principle offers consistency

When it comes to accounting, small business owners, who often have no background in accounting, prefer simplicity and consistency. Using the cost principle offers both. Rather than recording the value of an asset based on fair market value, which can fluctuate widely, your assets will all be recorded at their actual cost.

This ensures that the asset value reported on your balance sheet is consistent from period to period, that there is a means to verify the cost of the asset, and that asset value is not manipulated.

While there are drawbacks to using the cost principle, in most cases those drawbacks are reserved for larger companies with multiple investments or volatile, short-term securities. If you're looking to make the accounting process easier for your small business, you can start by using historical cost principle accounting.

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What is the cost principle?

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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Definition of Cost Principle

The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle.

The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired. Further, the amount recorded will not be increased for inflation or improvements in market value. (An exception is the change in market value of a short-term investment in the capital stock of a corporation whose shares of stock are actively traded on a major stock exchange.)

Example of Cost Principle

The cost principle means that a long-term asset purchased for the cash amount of $50,000 will be recorded at $50,000. If the same asset was purchased for a down payment of $20,000 and a formal promise to pay $30,000 within a reasonable period of time and with a reasonable interest rate, the asset will also be recorded at $50,000.

A long-term asset that will be used in a business (other than land) will be depreciated based on its cost. The cost will be reported on the balance sheet along with the amount of the asset’s accumulated depreciation . Further, the accumulated depreciation cannot exceed the asset’s cost.

The cost principle prohibits a company from recording an asset that was not acquired in a transaction. Hence, a company cannot report its highly successful management team as an asset nor can it report its highly valuable trademark that it developed over many years. (As a result of the cost principle, some of a company’s most valuable assets will not appear as assets on the company’s balance sheet.) On the other hand, if the company acquires a competitor’s trademark in a $3 million transaction, that trademark will be reported as an asset at its cost of $3 million.

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What Is Cost Principle?

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Cost principle is the accounting practice stating that any assets owned by a company will be recorded at their original cost, not their current market value. The purpose of using the cost principle method is to maintain reliable information across financial documents and provide consistency in verifying an asset’s cost at the time of purchase.

Definition and Examples of Cost Principle

Cost principle is the accounting practice of recording the original purchase price of an asset on all financial statements. This historic cost of an asset is used to provide reliable and consistent records. A cost principle will also include expenses incurred in purchasing the asset, such as shipping and delivery fees, as well as setup and training fees.

Cost principle is a standard accounting practice for publicly traded companies. Using cost principle follows the Generally Accepted Accounting Procedures (GAAP) , which is established by the Financial Accounting Standards Board (FASB).

Financial assets such as stocks and bonds are excluded from cost principle as these are recorded as fair market value.

• Alternate name : historical cost principle

An example of cost principle is a business purchasing a plot of land for $40,000 in 2019 that it planned to use as a parking lot. By 2022, the plot of land is valued at $80,000. The business would report the original cost of $40,000 on its financial statements, despite the asset appreciating in value.

How Cost Principle Works

When a business owner purchases something of value, such as land, a building, or equipment, it is defined as a business asset . As a business asset, it possesses two values: the original cost that was paid and the fair market value.

Typically, short-term assets and liabilities are recorded using the cost principle method, since a business may not have possession of them long enough for their values to significantly change prior to their liquidation or settlement.

The purpose of the cost principle is to ensure that financial statements record the original cost of a valuable asset. A company may not record what it estimates or thinks the value of the asset is, only what is verifiable.

Cost principle does not take inflation into consideration.

Recording the cost principle is essential because it is:

• Consistent : The value originally recorded will never change despite an asset appreciating in value.
• Comparable : As a business owner, it is important to be able to make decisions concerning your assets. By using the cost principle, you will be able to see the original costs of all assets.
• Verifiable : Using the same value on all financial records is an uncomplicated and straightforward process of knowing a business’s assets. An accountant or bookkeeper will never need to refer to other documents to understand.

Since cost principle is a fundamental concept of accounting for businesses, it is important to understand its purpose in recording assets and how it assists accountants and bookkeepers with verifying information effectively.

Key Takeaways

• Cost principle, also referred to as historical cost principle, is an accounting practice that records the original purchase price of assets on financial statements despite fluctuating market changes.
• The concept of cost principle is one of the five Generally Accepted Accounting Procedures (GAAP), which is established by the Financial Accounting Standards Board (FASB).
• The purpose of cost principle is to easily identify the original value of an asset on financial documents.
• Exceptions to the cost principle rule of recording assets are stocks and bonds, which are recorded at their fair market values.

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OpenStax. “ Principles of Accounting, Volume 1: Financial Accounting ,” Page 129.

University of Indiana Office of University Controller. “ Accounting Principles .”

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What Is the Cost Principle?

Cost accounting makes it easy to track the value of large assets on your books. Here's how to use it in your small business.

Table of Contents

The cost principle is an important part of financial reporting, as it encompasses the value of a business asset. By recording the cash value of an asset when it is acquired, you’ll understand its fixed value rather than mapping its worth over time. 

Here’s everything you should know about the cost principle, as well as how to use it for your business.

Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is the cost principle?

The cost principle is the idea that companies should value large fixed assets, like real estate and machinery, based on what the company paid for them at the time of acquisition, rather than at their current fair market value. The cost principle is one of the four U.S. Generally Accepted Accounting Principles (GAAP) and considered a more conservative (and potentially more accurate) way to value large assets. 

Applying the cost principle maintains consistent and conservative values of your business’s assets. Unlike fair market value, which is often subjective and dependent on the market, the original purchase price of an asset remains fixed over time. By applying the cost principle, you can keep your balance sheet consistent between periods and won’t need to update your financial statements with current fair market values. 

How is the cost principle used?

The cost principle helps ensure business assets are based on their actual cost rather than their value based on the market’s constant fluctuations. The principle is most often reflected in a company’s balance sheet, which includes values for all of the assets it owns, as well as debts owed to vendors (including for business loans used to acquire assets). [Read related article: 2024’s best business loans ]

Exceptions to the cost principle

The cost principle is one of the most conservative ways to track the values of multiple large assets, but there are some notable cases where cost accounting should not be used.      

• Accounts receivable : Money owed to a business by its customers should not be recorded at the original amount owed. To be conservative, companies should use the amount they expect to receive when the account is paid (the net realizable balance).
• Highly liquid assets : If a business owns assets for which there is a ready market (meaning the business can quickly sell the asset and turn it into cash), using the cost principle to value these assets may be too conservative and make the balance sheet inaccurate. This is especially true for assets that, though liquid, may be held on a company’s books for long periods of time. Shares of stock in publicly traded companies, for example, are typically valued at fair market value (plus a possible discount if the company needs to sell at a small loss).  

Example of the cost principle

As an illustration of how the cost principle works, consider a small manufacturer that purchased a packing machine for $100,000 in 2018. The asset is added to the company’s balance sheet with a value of $100,000. 

In 2024, the fair market value of that equipment has increased to $130,000, due to higher prices for goods that the manufacturer is making and supply chain issues in getting that particular piece of equipment. Under the cost principle, the asset remains on the company’s books with a value of $85,000 ($100,000 minus $15,000 in depreciation) and is not adjusted to reflect the current market conditions. 

Similarly, if the same company purchased its manufacturing facility and land for $600,000 in 2000, the real estate will remain on its books for the purchase price rather than its current market value of $3 million. 

On the other hand, if the same company invested $200,000 in Tesla stock in 2017, the value of that liquid investment should be updated to reflect its current value after each accounting period. This is because stock in a publicly traded company like Tesla is a highly liquid asset and a common exception to the cost principle. 

Pros and cons of cost accounting

Cost accounting enables businesses to detail the actual cost of expenditures and is easy to maintain from period to period. However, this method doesn’t always accurately reflect the current value of assets and may result in your business being undervalued. Familiarize yourself with the pros and cons of cost accounting to better understand how items are reflected on your balance sheet and when to use cost accounting for your business. [Read related article: The Best Accounting Software Providers ]

Advantages of the cost principle

The cost principle is a popular accounting method because it’s simple, straightforward and conservative. It lets businesses easily identify, verify and maintain expenses over time — without having to update the value of assets as often. 

It details actual costs for budgeting purposes.

By valuing assets at the price paid when they were acquired, businesses are able to track how the cost to acquire those assets is changing over time. Businesses can also make budgeting decisions based on historical purchases and long-term trends in price. They can see how their assets’ values change over time. This helps them make decisions about whether to buy equipment new or secondhand based on how the value of that equipment is likely to change in the future.

Asset values are objective and can be easily verified.

One of the biggest advantages of cost accounting is its simplicity. All you need to know in order to use cost accounting is how much you paid for an asset. Of course, you can also depreciate any capitalized assets over time. The IRS outlines depreciation schedules for taxpayer use, and a trained accountant can also implement them. Any depreciation of assets creates recurring tax benefits for business, as depreciation can be offset against the business’s income.

It does not require updating from period to period.

Aside from updating the values of depreciating assets, cost accounting means you do not need to bother updating the values of large assets on your balance sheet. This holds true even if the values of the assets fluctuate over time. Cost accounting can also prevent you from overestimating the values of your assets, which is important if you’re seeking financing or considering a merger or acquisition.

Disadvantages of the cost principle

In general, the drawbacks of cost accounting are more significant for larger companies than for small businesses. This is particularly true for businesses with diverse and ever-changing product lines and those that are invested in volatile securities. However, the cost principle does have some shortcomings that may result in even small businesses being undervalued.

It does not accurately reflect an asset’s current value.

Some business equipment, like computers, are never worth more than what you paid for it. But for many capitalized assets, like real estate or heavy equipment, the opposite is often true. Real estate is a prime example. With values changing all the time, companies that purchased real estate property even five years ago could almost certainly get more for that property now. Yet cost accounting requires they continue to value that asset at the price they paid for it, less any depreciation.

It may result in your business being undervalued.

Because cost accounting often undervalues the assets on a business’s balance sheet, it can lead to the business itself being dramatically undervalued. This can present difficulties when applying for business financing to expand your business, negotiating to merge or sell your business, and so on. This means it’s critical to understand how cost accounting works and how it impacts your specific situation. Being able to explain your business’s finances to lenders and investors is crucial to expansion and success.

It can incur unexpected tax liabilities.

When your business sells an asset, it will typically be sold at fair market value rather than the price you paid for it. This difference is considered a capital gain and is taxable at up to normal corporate income tax rates. 

This tax is especially significant for large assets that depreciate over time. If you sell an asset that has been depreciated for more than the value of the asset on your books, the resulting capital gain is called depreciation recapture and can lead to large, unexpected tax liability.

It doesn’t account for inflation or deflation.

One of the biggest drawbacks of cost accounting is that it ignores established long-term pricing trends for many large assets, including real estate. Because of inflation and other factors, the prices of many assets change over time in predictable ways. Cost accounting ignores those trends and instead values assets based on rigid cost principles. While this process can produce short-term tax benefits for your business, it can lead to significant misalignments between your firm’s balance sheet and market prices in the long run.

Cost principle

The cost principle can be a helpful tool when it comes to financial reporting within your business. This ensures your assets are based on their initial costs versus their market value over time. Additionally, it helps with budgeting without requiring consistent updates.

However, as with anything, there are some drawbacks to consider when using the cost principle in your financial reporting. For example, you could potentially undervalue your business or overlook your assets’ current values.

Sammi Caramela contributed to this article.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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What The Cost Principle Is And Why You Need To Know It

A business’s accounts receivable, as they might instead be recorded as realizable value, meaning these assets may not have been paid in full by customers or clients yet. In this article, you will learn what the cost principle is, the advantages and disadvantages of the cost principle and how it can be applied to a business through the use of relevant examples. Capital expenditures for improvements to land or buildings which materially increase their value or useful life is unallowable. This does not apply to cost associated with Capital Improvement Project funds received from the State for that purpose. Allocation of costs based on forecasts, revenues received, budgeted revenues, budgeted costs, or anticipated contract reimbursements are not acceptable or allowable. Is necessary to the overall operation of the provider, although a direct relationship to any particular cost objectives cannot be shown.

Costs incurred by IHEs for, or in support of, alumni/ae activities are unallowable. Program outreach and other specific purposes necessary to meet the requirements of the Federal award. The federally negotiated indirect rate, distribution base, and rate type for a non-Federal entity (except for the Indian tribes or tribal organizations, as defined in the Indian Self Determination, Education and Assistance Act, 25 U.S.C. 450b) must be available publicly on an OMB-designated Federal website. Is necessary to the overall operation of the non-Federal entity and is assignable in part to the Federal award in accordance with the principles in this subpart. Whether the non-Federal entity significantly deviates from its established practices and policies regarding the incurrence of costs, which may unjustifiably increase the Federal award’s cost. Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the non-Federal entity, its employees, where applicable its students or membership, the public at large, and the Federal Government. Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles.

Per US GAAP, the PPE is recorded at the historical cost and require to change to the value in the financial statements even if the market value of assets is an increase or decrease. The example of the historical cost principle in IFRS, PPE per IFRS requires to record initially at cost, and the value will be subsequently reduced by depreciation or impairment. The cost principle might not reflect a current value of long-term property after so many years. For example, a building could be worth a different price now than it was 50 years ago. For some assets, the price principle doesn’t reflect what the asset is currently worth. If an asset belongs to a market that frequently fluctuates, you might need to look at its fair market value.

Accordingly, recording assets at acquisition cost meets the convention of objectivity. Moreover, the present value of assets constantly undergoes change, meaning that if we were to record assets based on their present value, they would need to be updated practically every day.

Costs incurred for intramural activities, student publications, student clubs, and other student activities, are unallowable, unless specifically provided for in the Federal award. The continuing costs of ownership of the vacant former home after the settlement or lease date of the employee’s new permanent home, such as maintenance of buildings and grounds (exclusive of fixing-up expenses), utilities, taxes, and property insurance. Special emoluments, fringe benefits, and salary allowances incurred to attract professional personnel that do not meet the test of reasonableness or do not conform with the established practices of the non-Federal entity, are unallowable. Whether the service can be performed more economically by direct employment rather than contracting.

Asset Impairment Vs Historical Cost

That chapter includes excise taxes imposed in connection with qualified pension plans, welfare plans, deferred compensation plans, or other similar types of plans. Taxes on real or personal property, or on the value, use, possession or sale thereof, which is used solely in connection with work other than on Government contracts (see paragraph of this section). Items which the contract schedule specifically excludes, shall be allowable only as depreciation or amortization. For miscellaneous costs of the type discussed in paragraph of this subsection, a lump-sum amount, not to exceed $5,000, may be allowed in lieu of actual costs. The difference between the mortgage interest rates of the old and new residences times the current balance of the old mortgage times 3 years.

What are the two basic components of total cost?

It consists of variable costs and fixed costs. Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs. Calculating total cost: This graphs shows the relationship between fixed cost and variable cost. The sum of the two equal the total cost.

In 2006, Google bought YouTube for $1.65 billion as one of the most significant tech acquisitions in history. As per Cost Principal in the books of Google, the value of YouTube will be shown as $1.65 billion. Accounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts.

Book Value Of An Asset And Historical Cost

They are to be used in conjunction with the other provisions of this part in termination situations. Meet the definition of “direct cost” as described in the applicable cost principles.

Adjustments for normal wear and tear are usually recorded as annual depreciation, which is then subtracted from the historical cost to calculate the asset’s book value. The book value is an asset’s historical cost less any depreciation and impairment costs. Book value is calculated by subtracting depreciation or amortization from the original cost of that asset. The cost of intangible assets, like copyrights, patents, and trademarks, is recorded as the cost of producing the asset. For example, the cost you paid for someone to create a trademark for your business, added to the cost of having an attorney register the trademark, would be major parts of the cost of that trademark. The cost principle implies that you should not revalue an asset, even if its value has clearly appreciated over time.

The portion of such costs that exceeds the cost of airfare as provided for in paragraph of this section, is unallowable. Under some extraordinary circumstances, where it is in the best interest of the Federal Government and the non-Federal entity to establish alternative costing arrangements, such arrangements may be worked out with the Federal cognizant agency for indirect costs. Where the costs incurred for a service are not material, they may be allocated as indirect (F&A) costs. The costs of each service must consist normally of both its direct costs and its allocable share of all indirect (F&A) costs.

Characteristics Of The Cost Concept Of Accounting

A cost is allocable to a specific grant, function, department, or other component, known as a cost objective, if the goods or services involved are chargeable or assignable to that cost objective in accordance with the relative benefits received or other equitable relationship. A cost is allocable to a grant if it is incurred solely in order to advance work under the grant; it benefits both the grant and other work of the institution, including other grant-supported projects; or it is necessary to the overall operation of the organization and is deemed to be assignable, at least in part, to the grant. A cost is allocable as a direct cost Costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. To a grant if it is incurred solely in order to advance work under the grant or meets the criteria for closely related projects determination (see Cost Considerations-Allocation of Costs and Closely Related Work). This subpart provides the principles for determining the cost applicable to work performed by nonprofit organizations under contracts with the Government. Costs incurred by contractor personnel on official company business are allowable, subject to the limitations contained in this subsection.

What is cost center accounting in ERP?

You use Cost Center Accounting for controlling purposes within your organization. The costs incurred by your organization should be transparent. This enables you to check the profitability of individual functional areas and provide decision-making data for management.

The qualifications of the individual or concern rendering the service and the customary fees charged, especially on non-federally funded activities. The past pattern of such costs, particularly in the years prior to Federal awards. Costs of membership in any civic or community organization are allowable with prior approval by the Federal awarding agency or pass-through entity.

Should You Be Using The Cost Principle?

The costs of deferred compensation awards are unallowable if the awards are made in periods subsequent to the period when the work being remunerated was performed. Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances. “Advertising” means the use of media to promote the sale of products or services and to accomplish the activities referred to in paragraph of this subsection, regardless of the medium employed, when the advertiser has control over the form and content of what will appear, the media in which it will appear, and when it will appear. Advertising media include but are not limited to conventions, exhibits, free goods, samples, magazines, newspapers, trade papers, direct mail, dealer cards, window displays, outdoor advertising, radio, and television.

For individuals looking to take out homeowner insurance, they need to know the difference between replacement cost vs actual cash value. Short Term AssetsShort term assets are the assets that are highly liquid in nature and can be easily sold to realize money from the market. They have a maturity of fewer than 12 months and are highly tradable and marketable in nature. If a company wants to sell its asset at that time of selling, there can be some confusion arise, because the market value of that asset, at which company wants to sell, will be quite different than the book value of the asset. Since asset price will be changed over the years, so this method is not the accurate one as it is not showing the fair value of the asset.

This is not entirely the case under Generally Accepted Accounting Principles, which allows some adjustments to fair value. The cost principle is even less applicable under International Financial Reporting Standards, which not only permits revaluation to fair value, but also allows you to reverse an impairment charge if an asset subsequently appreciates in value. The cost principle is also known as the historical cost principle and the historical cost concept.

Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. Where an institution treats a particular type of cost as a direct cost of sponsored awards, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all other activities of the institution. No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

Historical Cost Principle Limitations

This provision does not restrict the authority of the Federal awarding agency to identify taxes where Federal participation is inappropriate. Where the identification of the amount of unallowable taxes would require an inordinate amount of effort, the cognizant agency for indirect costs may accept a reasonable approximation thereof. When conditions in paragraph and of this section are met, non-Federal entities are not required to establish records to support the allowability of claimed costs in addition to records already required or maintained.

The assets shall be segregated in the trust, or otherwise effectively restricted, so that they cannot be used by the employer for other purposes. Exclude Federal income taxes, whether incurred by the fund or the contractor , unless the fund holding the plan assets is tax-exempt under the provisions of 26 USC 501. Terminal funding occurs when the entire PRB liability is paid in a lump sum upon the termination of employees (or upon conversion to such a terminal-funded plan) to an insurer or trustee to establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees. Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable. Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable.

• Except for nonqualified pension plans using the pay-as-you-go cost method, to be allowable in the current year, the contractor shall fund pension costs by the time set for filing of the Federal income tax return or any extension.
• Over the last five years, the Brazilian currency has been in double-digit inflation and the investment is not worth nearly what Bill paid for it.
• See the definition of indirect (facilities & administrative (F&A)) costs in § 200.1 of this part.
• Direct selling efforts are those acts or actions to induce particular customers to purchase particular products or services of the contractor.
• The allowance for operating costs may include costs for such items as fuel, filters, oil, and grease; servicing, repairs, and maintenance; and tire wear and repair.

An asset’s book value is a mathematical calculation, whereas its market value is based on perceived value in the market, which is generally based on supply and demand for such an asset. For example, the cost of the building and land, plus payments to a realtor and attorney to close the sale. The fact that everyone is using the same system makes it easier for everyone to know the exact value of business assets. The amount of depreciation or amortization is shown on the business income statement as an expense. An operating lease is a contract that permits the use of an asset but does not convey ownership rights of the asset. An impairment in accounting is a permanent reduction in the value of an asset to less than its carrying value. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

Identification with the Federal award rather than the nature of the goods and services involved is the determining factor in distinguishing direct from indirect (F&A) costs of Federal awards. Typical costs charged directly to a Federal award are the compensation of employees who work on that award, their related fringe benefit costs, the costs of materials and other items of expense incurred for the Federal award. If directly related to a specific award, certain costs that otherwise would be treated as indirect costs may also be considered direct costs. Examples include extraordinary utility consumption, the cost of materials supplied from stock or services rendered by specialized facilities, program evaluation costs, or other institutional service operations. There is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) cost in order to avoid possible double-charging of Federal awards.

The historical cost principle forms the foundation for an ongoing trade-off between usefulness and reliability of an asset. The value of an asset is likely to deviate from its original purchase price over time.

An asset’s market value is different than the amount recorded with the price principle. With the cost principle, you record the initial purchase amount in your accounting books for small business. When you buy assets for your small business, you need to account for them in your books. The cost principle is a simple method for managing the value of your long-term assets.

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How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated July 29, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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How to Do a Cost-Benefit Analysis & Why It’s Important

• 05 Sep 2019

Are you unsure whether a particular decision is the best one for your business? Are you questioning whether a proposed project will be worth the effort and resources that will go into making it a success? Are you considering making a change to your business, marketing, or sales strategy, knowing that it might have repercussions throughout your organization?

The way that many businesses, organizations, and entrepreneurs answer these, and other, questions is through business analytics —specifically, by conducting a cost-benefit analysis.

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What Is A Cost-Benefit Analysis?

A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Generally speaking, cost-benefit analysis involves tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision. (Sometimes, this value is represented as a ratio.)

If the projected benefits outweigh the costs, you could argue that the decision is a good one to make. If, on the other hand, the costs outweigh the benefits, then a company may want to rethink the decision or project.

There are enormous economic benefits to running these kinds of analyses before making significant organizational decisions. By doing analyses, you can parse out critical information, such as your organization’s value chain or a project’s ROI .

Cost-benefit analysis is a form of data-driven decision-making most often utilized in business, both at established companies and startups . The basic principles and framework can be applied to virtually any decision-making process, whether business-related or otherwise.

Related: 5 Business Analytics Skills for Professionals

Steps of a Cost-Benefit Analysis

1. establish a framework for your analysis.

For your analysis to be as accurate as possible, you must first establish the framework within which you’re conducting it. What, exactly, this framework looks like will depend on the specifics of your organization.

Identify the goals and objectives you’re trying to address with the proposal. What do you need to accomplish to consider the endeavor a success? This can help you identify and understand your costs and benefits, and will be critical in interpreting the results of your analysis.

Similarly, decide what metric you’ll be using to measure and compare the benefits and costs. To accurately compare the two, both your costs and benefits should be measured in the same “common currency.” This doesn’t need to be an actual currency, but it does frequently involve assigning a dollar amount to each potential cost and benefit.

2. Identify Your Costs and Benefits

Your next step is to sit down and compile two separate lists: One of all of the projected costs, and the other of the expected benefits of the proposed project or action.

When tallying costs, you’ll likely begin with direct costs , which include expenses directly related to the production or development of a product or service (or the implementation of a project or business decision). Labor costs, manufacturing costs, materials costs, and inventory costs are all examples of direct costs.

But it’s also important to go beyond the obvious. There are a few additional costs you must account for:

• Indirect costs: These are typically fixed expenses, such as utilities and rent, that contribute to the overhead of conducting business.
• Intangible costs: These are any current and future costs that are difficult to measure and quantify. Examples may include decreases in productivity levels while a new business process is rolled out, or reduced customer satisfaction after a change in customer service processes that leads to fewer repeat buys.
• Opportunity costs: This refers to lost benefits, or opportunities, that arise when a business pursues one product or strategy over another.

Once those individual costs are identified, it’s equally important to understand the possible benefits of the proposed decision or project. Some of those benefits include:

• Direct: Increased revenue and sales generated from a new product
• Indirect: Increased customer interest in your business or brand
• Intangible: Improved employee morale
• Competitive: Being a first-mover within an industry or vertical

3. Assign a Dollar Amount or Value to Each Cost and Benefit

Once you’ve compiled exhaustive lists of all costs and benefits, you must establish the appropriate monetary units by assigning a dollar amount to each one. If you don’t give all the costs and benefits a value, then it will be difficult to compare them accurately.

Direct costs and benefits will be the easiest to assign a dollar amount to. Indirect and intangible costs and benefits, on the other hand, can be challenging to quantify. That does not mean you shouldn’t try, though; there are many software options and methodologies available for assigning these less-than-obvious values.

4. Tally the Total Value of Benefits and Costs and Compare

Once every cost and benefit has a dollar amount next to it, you can tally up each list and compare the two.

If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.

Beyond simply looking at how the total costs and benefits compare, you should also return to the framework established in step one. Does the analysis show you reaching the goals you’ve identified as markers for success, or does it show you falling short?

If the costs outweigh the benefits, ask yourself if there are alternatives to the proposal you haven’t considered. Additionally, you may be able to identify cost reductions that will allow you to reach your goals more affordably while still being effective.

Related: Finance vs. Accounting: What's the Difference?

Pros and Cons of Cost-Benefit Analysis

There are many positive reasons a business or organization might choose to leverage cost-benefit analysis as a part of their decision-making process. There are also several potential disadvantages and limitations that should be considered before relying entirely on a cost-benefit analysis.

Advantages of Cost-Benefit Analysis

A data-driven approach.

Cost-benefit analysis allows an individual or organization to evaluate a decision or potential project free of biases. As such, it offers an agnostic and evidence-based evaluation of your options, which can help your business become more data-driven and logical.

Makes Decisions Simpler

Business decisions are often complex by nature. By reducing a decision to costs versus benefits, the cost-benefit analysis can make this dilemma less complex.

Uncovers Hidden Costs and Benefits

Cost-benefit analysis forces you to outline every potential cost and benefit associated with a project, which can uncover less-than-obvious factors like indirect or intangible costs.

Limitations of Cost-Benefit Analysis

Difficult to predict all variables.

While cost-benefit analysis can help you outline the projected costs and benefits associated with a business decision, it’s challenging to predict all the factors that may impact the outcome. Changes in market demand, material costs, and the global business environment are unpredictable—especially in the long term.

Incorrect Data Can Skew Results

If you’re relying on incomplete or inaccurate data to finish your cost-benefit analysis, the results of the analysis will follow suit.

Better Suited to Short- and Mid-Length Projects

For projects or business decisions that involve longer timeframes, cost-benefit analysis has a greater potential of missing the mark for several reasons. For one, it’s typically more difficult to make accurate predictions the further into the future you go. It’s also possible that long-term forecasts won’t accurately account for variables such as inflation, which can impact the overall accuracy of the analysis.

Removes the Human Element

While a desire to make a profit drives most companies, there are other, non-monetary reasons an organization might decide to pursue a project or decision. In these cases, it can be difficult to reconcile moral or “human” perspectives with the business case.

In the end, cost-benefit analysis shouldn't be the only business analytics tool or strategy you use in determining how to move your organization into the future. Cost-benefit analysis isn’t the only type of economic analysis you can do to assess your business’s economic state, but a single option at your disposal.

Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market.

This post was updated on July 12, 2022. It was originally published on September 5, 2019.

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Understanding the Cost Principle

Cost accounting makes it easy for small business owners to track the value of the assets on their books . A key element of this practice is the cost principle: the idea that you should value your assets based on what you initially paid for them, rather than their current market value. This will help you throughout the accounting cycle, as you won’t need to repeatedly adjust the value of the assets on your balance sheet as they fluctuate through the year. And if any of that sounds confusing, don’t worry – just refer to our guide on the accounting equation !

Now, let’s take a deeper look at the role the cost principle plays on your balance sheet so that your small business accounting process is as seamless as possible.

What is the Cost Principle?

One of the underlying accounting principles, along with the conservatism principle  and the consistency principle , the cost principle states that your assets will be recorded on your small business’ books at whatever their cash value was at the time they were acquired. This means that the asset amounts recorded on your financial statements will be their actual value, as opposed to their current market value.

Why use the original acquisition cost of assets? For one, this will ensure that an objective and verifiable cost is recorded on the books . This will protect your small business in the event that the market value of your asset drops below your original purchase price. Correct use of the cost principle will also lessen the burden of the accounting proceess on you as a small business owner! Win-win!

Understanding Depreciation

Although the cost principle requires you to record the original acquisition cost of your assets, you will still need to factor in something called depreciation for certain assets. In short, depreciation recognizes that the value of your long-term assets decreases over time.

Let’s look at an example of this:

• Say you acquired a piece of equipment at a cash value of $20,000, expecting that it will last for five years. Following the straight-line depreciation method , you will record depreciation expense of $4,000 each year.
• So, how will this appear on your balance sheet? Simple: take your historical cost, which was $20,000, and subtract the accumulated depreciation of your asset!

Some Issues with the Cost Principle

There are a few problems that come up when a small business owner applies the cost principle. If your company has any valuable logos or brand names, you wouldn’t be able to reflect their asset value on your balance sheet.

Imagine a content creator, for example – there is an ‘intangible’ value to their brand. Use of the cost principle wouldn’t allow them to truly reflect the value of their small business in the event that they were looking to secure a loan, or raise new capital. Not exactly ideal – but exactly why small business accounting software exists!

Short-Term vs Long-Term Assets

Another key element of small business accounting is understanding the nature, or time-length, or the assets that you own. Luckily, small business accounting software makes this easy. Just remember the two essential asset categories that we described above – and stick to these two simple rules to eliminate any accounting challenges down the line:

• Short-term assets? Don’t use the cost principle.
• Long-term assets? Use the cost principle .

It’s always smart to use small business accounting software that automates these processes. Luckily, products like TrulySmall make the user experience seamless. Trust in the best small business accounting software, so that you can focus on doing the work that led you to owning your own business in the first place!

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Business Plan: What It Is and How to Write One in 9 Steps

Business plans aren’t just for entrepreneurs who need to secure funding—they can help you plan and evaluate new ideas or growth plans, too. Find out how to write a business plan and get the most out of the process in this comprehensive guide.

A great business plan can help you clarify your strategy, identify potential roadblocks, determine necessary resources, and evaluate the viability of your idea and growth plan before you start a business .

Not every successful business launches with a formal business plan, but many founders find value in the process. When you make a business plan, you get to take time to step back, research your idea and the market you’re looking to enter, and understand the scope and the strategy behind your tactics.

Learn how to write a business plan with this step-by-step guide, including tips for getting the most of your plan and real business plan examples to inspire you.

What is a business plan?

A business plan is a strategic document that outlines a company’s goals, strategies for achieving them, and the time frame for their achievement. It covers aspects like market analysis , financial projections, and organizational structure. Ultimately, a business plan serves as a roadmap for business growth and a tool to secure funding.

Often, financial institutions and investors need to see a business plan before funding any project. Even if you don’t plan to seek outside funding, a well-crafted plan becomes the guidance for your business as it scales.

The key components of a business plan

Putting together a business plan will highlight the parts of your company’s strategy and goals. It involves several key business plan components that work together to show the roadmap to your success.

Your business plan’s key components should include: 

• Executive summary: A brief overview of your entire plan.
• Company description: An explanation of what your business does and why it’s unique. 
• Market analysis: Research on your industry, target market, and competitors.
• Organization and management: Details about your business structure and the people running it.
• Products or services: A description of what you’re selling and how it benefits customers. 
• Customer segmentation: A breakdown of your target market into different groups.
• Marketing and sales plan: The strategy for promoting and selling your products and services.
• Logistics and operations: An overview of how your business will run its daily activities and manage resources.
• Financials: A complete look at projected income, expenses, and funding needs. 

How to write a business plan in 9 steps

• Draft an executive summary
• Write a company description
• Perform a market analysis
• Outline the management and organization
• List your products and services
• Perform customer segmentation
• Define a marketing plan
• Provide a logistics and operations plan
• Make a financial plan

Few things are more intimidating than a blank page. Starting your business plan with a structured outline and key elements for what you’ll include in each section is the best first step you can take.

Since an outline is such an important step in the process of writing a business plan, we’ve put together a high-level overview to get you started (and help you avoid the terror of facing a blank page).

Once you have your business plan template in place, it’s time to fill it in. We’ve broken it down by section to help you build your plan step by step.

1. Draft an executive summary

A good executive summary is one of the most crucial sections of your business plan—it’s also the last section you should write.

The executive summary distills everything that follows and gives time-crunched reviewers (e.g., potential investors and lenders) a high-level overview of your business that persuades them to read further.

Again, it’s a summary, so highlight the key points you’ve uncovered while writing your plan. If you’re writing for your own planning purposes, you can skip the summary altogether—although you might want to give it a try anyway, just for practice.

An executive summary shouldn’t exceed one page. Admittedly, that space constraint can make squeezing in all of the salient information a bit stressful—but it’s not impossible. 

Your business plan’s executive summary should include:

• Business concept. What does your business do?
• Business goals and vision. What does your business want to accomplish?
• Product description and differentiation. What do you sell, and why is it different?
• Target market. Who do you sell to?
• Marketing strategy. How do you plan on reaching your customers?
• Current financial state. What do you currently earn in revenue?
• Projected financial state. What do you foresee earning in revenue?
• The ask. How much money are you asking for?
• The team. Who’s involved in the business?

2. Write a company description

This section of your business plan should answer two fundamental questions: 

• Who are you?
• What do you plan to do? 

Answering these questions with a company description provides an introduction to why you’re in business, why you’re different, what you have going for you, and why you’re a good investment. 

For example, clean makeup brand Saie shares a letter from its founder on the company’s mission and why it exists.

Clarifying these details is still a useful exercise, even if you’re the only person who’s going to see them. It’s an opportunity to put to paper some of the more intangible facets of your business, like your principles, ideals, and cultural philosophies.

Here are some of the components you should include in your company description:

• Your business structure (Are you a sole proprietorship, general partnership, limited partnership, or incorporated company?)
• Your business model
• Your industry
• Your business’s vision, mission, and value proposition
• Background information on your business or its history
• Business objectives, both short and long term
• Your team, including key personnel and their salaries

Brand values and goals

To define your brand values , think about all the people your company is accountable to, including owners, employees, suppliers, customers, and investors. Now consider how you’d like to conduct business with each of them. As you make a list, your core values should start to emerge.

Your company description should also include both short- and long-term goals. Short-term goals, generally, should be achievable within the next year, while one to five years is a good window for long-term goals. Make sure your goal setting includes SMART goals : specific, measurable, attainable, realistic, and time-bound.

Vision and mission statements

Once you know your values, you can write a mission statement . Your statement should explain, in a convincing manner, why your business exists, and should be no longer than a single sentence.

Next, craft your vision statement : What impact do you envision your business having on the world once you’ve achieved your vision? Phrase this impact as an assertion—begin the statement with “We will” and you’ll be off to a great start. Your vision statement, unlike your mission statement, can be longer than a single sentence, but try to keep it to three at most. The best vision statements are concise.

3. Perform a market analysis

Market analysis is a key section of your business plan, whether or not you ever intend for anyone else to read it.

No matter what type of business you start, whether a home-based business or service-based, it’s no exaggeration to say your market can make or break it. Choose the right market for your products—one with plenty of customers who understand and need your product—and you’ll have a head start on success. 

If you choose the wrong market, or the right market at the wrong time, you may find yourself struggling for each sale. Your market analysis should include an overview of how big you estimate the market is for your products, an analysis of your business’s position in the market, and an overview of the competitive landscape. Thorough research supporting your conclusions is important both to persuade investors and to validate your own assumptions as you work through your plan.

How big is your potential market?

The potential market is an estimate of how many people need your product. While it’s exciting to imagine sky-high sales figures, you’ll want to use as much relevant independent data as possible to validate your estimated potential market.

Since this can be a daunting process, here are some general tips to help you begin your research:

• Understand your ideal customer profile. Look for government data about the size of your target market , learn where they live, what social channels they use, and their shopping habits.
• Research relevant industry trends and trajectory. Explore consumer trends and product trends in your industry by looking at Google Trends, trade publications, and influencers in the space.
• Make informed guesses. You’ll never have perfect, complete information about your total addressable market. Your goal is to base your estimates on as many verifiable data points as necessary.

Some sources to consult for market data include government statistics offices, industry associations, academic research, and respected news outlets covering your industry.

Read more: What is a Marketing Analysis? 3 Steps Every Business Should Follow

SWOT analysis

A SWOT analysis looks at your strengths, weaknesses, opportunities, and threats. 

That involves asking questions like: 

• What are the best things about your company? 
• What are you not so good at? 
• What market or industry shifts can you take advantage of and turn into opportunities? 
• Are there external factors threatening your ability to succeed?

SWOT is often depicted in a grid or otherwise visual way. With this visual presentation, your reader can quickly see the factors that may impact your business and determine your competitive advantage in the market.

Competitive analysis

There are three overarching factors you can use to differentiate your business in the face of competition:

• Cost leadership. You have the capacity to maximize profits by offering lower prices than the majority of your competitors. Examples include companies like Mejuri and Endy .
• Differentiation. Your product or service offers something distinct from the current cost leaders in your industry and banks on standing out based on your uniqueness. Think of companies like Knix and QALO .
• Segmentation. You focus on a very specific, or niche, target market, and aim to build traction with a smaller audience before moving on to a broader market. Companies like TomboyX and Heyday Footwear are great examples of this strategy.

To understand which is the best fit, you’ll need to understand your business as well as the competitive landscape.

You’ll always have competition in the market, even with an innovative product, so it’s important to include a competitive overview in your business plan. If you’re entering an established market, include a list of a few companies you consider direct competitors and explain how you plan to differentiate your products and business from theirs.

For example, if you’re selling jewelry , your competitive differentiation could be that, unlike many high-end competitors, you donate a percentage of your profits to a notable charity or pass savings on to your customers.

If you’re entering a market where you can’t easily identify direct competitors, consider your indirect competitors—companies offering products that are substitutes for yours. For example, if you’re selling an innovative new piece of kitchen equipment, it’s too easy to say that because your product is new, you have no competition. Consider what your potential customers are doing to solve the same problems.

4. Outline the management and organization

The management and organization section of your business plan should tell readers about who’s running your company. Detail the legal structure of your business. Communicate whether you’ll incorporate your business as an S corporation or create a limited partnership or sole proprietorship.

If you have a management team, use an organizational chart to show your company’s internal structure, including the roles, responsibilities, and relationships between people in your chart. Communicate how each person will contribute to the success of your startup.

5. List your products and services

Your products or services will feature prominently in most areas of your business plan, but it’s important to provide a section that outlines key details about them for interested readers.

If you sell many items, you can include more general information on each of your product lines. If you only sell a few, provide additional information on each. 

For example, bag shop BAGGU sells a large selection of different types of bags, in addition to home goods and other accessories. Its business plan would list out those categories and key details about the products within each category.

Describe new products you’ll launch in the near future and any intellectual property you own. Express how they’ll improve profitability. It’s also important to note where products are coming from—handmade crafts are sourced differently than trending products for a dropshipping business, for instance.

6. Perform customer segmentation

Your ideal customer, also known as your target market, is the foundation of your marketing plan , if not your business plan as a whole. 

You’ll want to keep this buyer persona in mind as you make strategic decisions, which is why an overview of who they are is important to understand and include in your business plan.

To give a holistic overview of your ideal customer, describe a number of general and specific demographic characteristics. Customer segmentation often includes:

• Where they live
• Their age range
• Their level of education
• Some common behavior patterns
• How they spend their free time
• Where they work
• What technology they use
• How much they earn
• Where they’re commonly employed
• Their values, beliefs, or opinions

This information will vary based on what you’re selling, but you should be specific enough that it’s unquestionably clear who you’re trying to reach—and more importantly, why you’ve made the choices you have based on who your customers are and what they value.

For example, a college student has different interests, shopping habits, and pricing sensitivity than a 50-year-old executive at a Fortune 500 company. Your business plan and decisions would look very different based on which one was your ideal customer.

Put your customer data to work with Shopify’s customer segmentation

Shopify’s built-in segmentation tools help you discover insights about your customers, build segments as targeted as your marketing plans with filters based on your customers’ demographic and behavioral data, and drive sales with timely and personalized emails.

7. Define a marketing plan

Your marketing efforts are directly informed by your ideal customer. That’s why, as you outline your current decisions and future strategy, your marketing plan should keep a sharp focus on how your business idea is a fit for that ideal customer.

If you’re planning to invest heavily in Instagram marketing or TikTok ads , for example, it makes sense to include whether Instagram and TikTok are leading platforms for your audience. If the answer is no, that might be a sign to rethink your marketing plan.

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Most marketing plans include information on four key subjects. How much detail you present on each will depend on both your business and your plan’s audience.

• Price: How much do your products cost, and why have you made that decision?
• Product: What are you selling and how do you differentiate it in the market?
• Promotion: How will you get your products in front of your ideal customer?
• Place: Where will you sell your products? On what channels and in which markets?

Promotion may be the bulk of your plan, since you can more readily dive into tactical details, but the other three areas should be covered at least briefly—each is an important strategic lever in your marketing mix.

8. Provide a logistics and operations plan

Logistics and operations are the workflows you’ll implement to make your business idea a reality. If you’re writing a business plan for your own planning purposes, this is still an important section to consider, even though you might not need to include the same level of detail as if you were seeking investment.

Cover all parts of your planned operations, including:

• Suppliers. Where do you get the raw materials you need for production, or where are your products produced?
• Production. Will you make, manufacture, wholesale , or dropship your products? How long does it take to produce your products and get them shipped to you? How will you handle a busy season or an unexpected spike in demand?
• Facilities. Where will you and any team members work? Do you plan to have a physical retail space? If yes, where?
• Equipment. What tools and technology do you require to be up and running? This includes everything from software to lightbulbs and everything in between.
• Shipping and fulfillment. Will you be handling all the fulfillment tasks in-house, or will you use a third-party fulfillment partner?
• Inventory. How much will you keep on hand, and where will it be stored? How will you ship it to partners if required, and how will you approach inventory management ?

This section should signal to your reader that you’ve got a solid understanding of your supply chain, with strong contingency plans in place to cover potential uncertainty. If your reader is you, it should give you a basis to make other important decisions, like how to price your products to cover your estimated costs, and at what point you anticipate breaking even on your initial spending.

9. Make a financial plan

No matter how great your idea is—and regardless of the effort, time, and money you invest—a business lives or dies based on its financial health. At the end of the day, people want to work with a business they expect to be viable for the foreseeable future.

The level of detail required in your financial plan will depend on your audience and goals, but typically you’ll want to include three major views of your financials: an income statement, a balance sheet, and a cash-flow statement. It also may be appropriate to include financial data and projections.

Here’s a spreadsheet template that includes everything you’ll need to create an income statement, balance sheet, and cash-flow statement, including some sample numbers. You can edit it to reflect projections if needed.

Let’s review the types of financial statements you’ll need.

Income statements

Your income statement is designed to give readers a look at your revenue sources and expenses over a given time period. With those two pieces of information, they can see the all-important bottom line or the profit or loss your business experienced during that time. If you haven’t launched your business yet, you can project future milestones of the same information.

Balance sheets

Your balance sheet offers a look at how much equity you have in your business. On one side, you list all your business assets (what you own), and on the other side, all your liabilities (what you owe). 

This provides a snapshot of your business’s shareholder equity, which is calculated as:

Assets - Liabilities = Equity

Cash flow statements

Your cash flow statement is similar to your income statement, with one important difference: it takes into account when revenues are collected and when expenses are paid.

When the cash you have coming in is greater than the cash you have going out, your cash flow is positive. When the opposite scenario is true, your cash flow is negative. Ideally, your cash flow statement will help you see when cash is low, when you might have a surplus, and where you might need to have a contingency plan to access funding to keep your business solvent .

It can be especially helpful to forecast your cash-flow statement to identify gaps or negative cash flow and adjust operations as required.

📚 Read more: Cash Flow Management: What It Is & How To Do It (+ Examples)

Why write a business plan?

Investors rely on business plans to evaluate the feasibility of a business before funding it, which is why business plans are commonly associated with getting a business loan. 

Business plans also help owners identify areas of weakness before launching, potentially avoiding costly mistakes down the road. “Laying out a business plan helped us identify the ’unknowns’ and made it easier to spot the gaps where we’d need help or, at the very least, to skill up ourselves,” says Jordan Barnett, owner of Kapow Meggings .

There are several other compelling reasons to consider writing a business plan, including:

• Strategic planning. Writing out your plan is an invaluable exercise for clarifying your ideas and can help you understand the scope of your business, as well as the amount of time, money, and resources you’ll need to get started.
• Evaluating ideas. If you’ve got multiple ideas in mind, a rough business plan for each can help you focus your time and energy on the ones with the highest chance of success.
• Research. To write a business plan, you’ll need to research your ideal customer and your competitors—information that will help you make more strategic decisions.
• Recruiting. Your business plan is one of the easiest ways to communicate your vision to potential new hires and can help build their confidence in the venture, especially if you’re in the early stages of growth.
• Partnerships. If you plan to collaborate with other brands , having a clear overview of your vision, your audience, and your business strategy will make it much easier for them to identify if your business is a good fit for theirs.
• Competitions. There are many business plan competitions offering prizes such as mentorships, grants, or investment capital. 

If you’re looking for a structured way to lay out your thoughts and ideas, and to share those ideas with people who can have a big impact on your success, making a business plan is an excellent starting point.

Business plan types

Business plan types can span from one page to multiple pages, with detailed graphs and reports. There’s no one right way to create a business plan. The goal is to convey the most important information about your company for readers.

Common business plans we see include, but are not limited to, the following types:

Traditional business plans

These are the most common business plans. Traditional business plans take longer to write and can be dozens of pages long. Venture capitalist firms and lenders ask for this plan. Traditional business plans may not be necessary if you don’t plan to seek outside funding. That’s where a lean business plan comes in.

Lean business plans

A lean business plan is a shorter version of a traditional business plan. It follows the same format, but only includes the most important information. Businesses use lean business plans to onboard new hires or modify existing plans for a specific target market. If you want to write a business plan purely for your own planning purposes when starting a new small business, a lean business plan is typically the way to go. 

Nonprofit business plans

A nonprofit business plan is for any entity that operates for public or social benefit. It covers everything you’ll find in a traditional business plan, plus a section describing the impact the company plans to make. For example, a speaker and headphone brand would communicate that they aim to help people with hearing disabilities. Donors often request this type of business plan.

📚 Read more: 7 Business Plan Examples to Inspire Your Own (2024)

7 tips for creating a small business plan

There are a few best practices when it comes to writing a business plan. While your plan will be unique to your business and goals, keep these tips in mind as you write.

1. Know your audience

When you know who will be reading your plan—even if you’re just writing it for yourself to clarify your ideas—you can tailor the language and level of detail to them. This can also help you make sure you’re including the most relevant information and figure out when to omit sections that aren’t as impactful.

2. Have a clear goal

When creating a business plan, you’ll need to put in more work and deliver a more thorough plan if your goal is to secure funding for your business, versus working through a plan for yourself or your team.

3. Invest time in research

Sections of your business plan will primarily be informed by your ideas and vision, but some of the most crucial information you’ll need requires research from independent sources. This is where you can invest time in understanding who you’re selling to, whether there’s demand for your products, and who else is selling similar products or services.

4. Keep it short and to the point

No matter who you’re writing for, your business plan should be short and readable—generally no longer than 15 to 20 pages. If you do have additional documents you think may be valuable to your audience and your goals, consider adding them as appendices.

5. Keep the tone, style, and voice consistent

This is best managed by having a single person write the plan or by allowing time for the plan to be properly edited before distributing it.

6. Use a business plan template

You can also use a free business plan template to provide a skeleton for writing a plan. These templates often guide you through each section—from financial projects to market research to mission statement—ensuring you don’t miss a step.

7. Try business plan software

Writing a business plan isn’t the easiest task for business owners. But it’s important for anyone starting or expanding a business. 

Fortunately, there are tools to help with everything from planning, drafting, creating graphics, syncing financial data, and more. Business plan software also has business plan templates and tutorials to help you finish a comprehensive plan in hours, rather than days.

A few curated picks include:

• LivePlan : the most affordable option with samples and templates
• Bizplan : tailored for startups seeking investment
• Go Small Biz : budget-friendly option with industry-specific templates

📚 Read more:  6 Best Business Plan Software Platforms (2024)

Common mistakes when writing a business plan

Other articles on business plans would never tell you what we’re about to tell you: Your business plan can fail. 

The last thing you want is for time and effort to go down the drain, so avoid these common mistakes:

• Bad business idea. Sometimes your idea may be too risky for potential investors or too expensive to run, or there’s no market. Aim for small business ideas that require low startup costs.
• No exit strategy. If you don’t show an exit strategy, or a plan for investors to leave the business with maximum profits, you’ll have little luck securing capital.
• Unbalanced teams. A great product is the cost of entry to starting a business. But an incredible team will take it to the top. Unfortunately, many business owners overlook a balanced team. They focus on potential profits, without worrying about how it will be done operationally. 
• Missing financial projections. Don’t forget your balance sheet, cash flow statements, P&L statements, and income statements. Include your break-even analysis and return-on-investment calculations in your financial projections to create a successful business plan.
• Spelling and grammar errors. All the best organizations have an editor review their documents. If someone spots typos while reading your business plan, sloppy errors like those can evoke a larger sense of distrust in your capabilities to run a successful company. It may seem minor, but legibility and error-free writing helps make a good impression on your business plan’s audience. 

Updating and revising a business plan

Business plans aren’t static documents. The business world moves fast and your plan will need to keep up. You don’t want it to get stale. 

Here’s a good rule of thumb for business plan revisions:

• Monthly: Update KPIs like sales, website traffic, and customer acquisition costs. Review your cash flow. Is your money situation as expected? Make the necessary changes.
• Quarterly : Are you hitting your targets? Be sure to update your financial performance, successful marketing campaigns, and any other recent milestones achieved.
• Yearly : Think of this as a big overhaul. Compare projections to actuals and update your forecasts. 

When updating your plan, don’t just go with your gut. Use data like surveys and website analytics to inform each update. Using outdated information will only lead to confusion and missed opportunities.

Remember not to just update one part of your plan—it’s all connected. Fortunately, with business plan software you can easily give your plan attention and help your business thrive. 

How to present a business plan

Here are some tips for presenting your business plan to stakeholders.

Understand your audience

Start by doing homework on who you’ll be presenting to. Are they investors, potential partners, or a bank? Each group will have different interests and expectations. 

Consider the following about your presentation audience:

• Background: What’s their professional experience?
• Knowledge level: How familiar are they with your industry?
• Interests: What aspects of your plan will excite them most?
• Concerns: What might make them hesitant about your idea?

Depending on who you’re presenting to, you can tweak your presentation accordingly. For example, if you’re presenting to a group of investors, you’d probably want to highlight financial projections and market analysis. 

Structure your presentation

Once you know your audience, you can organize your presentation. Think of this as the story you’ll tell listeners. A well-structured presentation helps listeners follow along and remember key points. 

Your opening should grab attention and give a snapshot of what’s to come. It’s kind of like an elevator pitch that gives an overview of your business idea. 

From there, break your presentation into clear sections:

• Problem: What issue are you solving?
• Solution: How does your business address this problem?
• Market: Who are your potential customers?
• Competition: Who else is in this space, and how are you different?
• Business model: How will you make money?
• Financial projections: What are your expected costs and revenues?
• Team: Who’s involved, and what makes them qualified?

Use visual aids to support your points. Graphs, charts, and even simple illustrations can make your information more digestible. Remember to practice your timing, too. A good presentation flows smoothly, giving each section the right amount of attention for its intended audience. 

Handle objections and questions

Facing objections or questions can be nerve-wracking, but it’s actually a great opportunity. It shows your listeners are engaged and thinking critically about your idea. The key is to be prepared and stay calm. 

Try to anticipate potential questions. Put yourself in the listener’s shoes: What would you want to know if you were them? Come up with clear answers to these questions ahead of time.

When handling questions:

• Listen carefully: Make sure you fully understand the question before answering.
• Stay positive: Even if the question seems critical, respond with enthusiasm.
• Be honest: If you don’t know something, it’s OK. Offer to find out and follow up. 

Use questions as a way to highlight the strengths of your business plan. If a question needs more thought or refresh, it’s perfectly fine to say, “That’s a great question. I’d love to look further into it and get back to you with a detailed answer.”

Handling questions well shows that you’re knowledgeable, thoughtful, and open to feedback—all things that will impress listeners and make them feel confident in your business plan. 

Prepare your business plan today

A business plan can help you identify clear, deliberate next steps for your business, even if you never plan to pitch investors—and it can help you see gaps in your plan before they become issues. 

Whether you’re working on starting a new online business idea , building a retail storefront, growing your established business, or purchasing an existing business , you now understand how to write a business plan that suits your business’s goals and needs.

Feature illustration by Rachel Tunstall

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Business plan FAQ

How do i write a business plan.

Learning how to write a business plan is simple if you use a business plan template or business plan software. Typically, a traditional business plan for every new business should have the following components:

• Executive summary
• Company description, including value proposition
• Market analysis and competitive analysis
• Management and organization
• Products and services
• Customer segmentation
• Marketing plan
• Logistics and operations
• Financial plan and financial projections

What is a good business plan?

A good business plan clearly communicates your company’s purpose, goals, and growth strategies. It starts with a strong executive summary, then adequately outlines idea feasibility, target market insights, and the competitive landscape. 

A business plan template can help businesses be sure to follow the typical format of traditional business plans, which also include financial projections, details about the management team, and other key elements that venture capital firms and potential investors want to see.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are: 

• To clarify your plans for growth
• To understand your financial needs
• To attract funding from investors or secure a business loan

What are the different types of business plans?

The types of business plans include startup, refocusing, internal, annual, strategic, feasibility, operations, growth, and scenario-based. Each type of business plan has a different purpose. Business plan formats include traditional, lean, and nonprofit. Find a business plan template for the type of plan you want to write.

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What is the cost principle definition & meaning.

When you’re starting to dive into accounting, you’ll come across an entire glossary of terms. Some of them may seem familiar, while others will be entirely foreign. Some of the familiar terms may have accounting-specific definitions, as well. One of these terms is the cost principle. When it comes to accounting, the cost principle is very important.

If you’re handling your business’s accounting, understanding the cost principle can help you in the long run. In this article we will be covering the concept of the cost principle, what it means, and how it can affect your business. Keep reading to find out more!

Here’s What We’ll Cover:

What is the Cost Principle?

Exceptions to the cost principle, appreciation and depreciation, other accounting methods, should my business be using the cost principle, the benefits of using the cost principle, the disadvantages of using the cost principle, 5 examples of the cost principle, using accounting software to make using the cost principle easier, frequently asked questions about the cost principle, key takeaways.

In accounting, there are several underlying guidelines. These are the accounting principles. One of those guidelines is the cost principle. It is also referred to as the historic cost principle.

The cost principle requires that a business records its assets at the cash amount it was acquired for. This original cost is maintained throughout the asset’s life. At no point in time should an asset be recorded at its fair market value.

What is an Asset?

It is assumed that the majority of business owners know what their assets are. However, to be thorough, it is important to state that assets are anything of value owned by a business. Because assets are an essential part of business, it is important that their value is recorded and reported accurately.

The Cost Principle Helps Maintain a Consistent Balance Sheet

Because the cost principle states that assets should be recorded at their original cost, the balance sheet is easier to maintain. This is due to the fact that the value of an asset can change after it was purchased. Market conditions can influence asset value greatly, depending on the item.

Assets normally depreciate, but some may increase in value. This can happen for a number of reasons. Something that is a few years old can go out of production. This could increase its value by making it rare, and desired. Sometimes scarcity can cause the same thing. Something that we’ve seen thanks to the pandemic is resource scarcity for vehicle production. As such, used vehicle prices have increased quickly. No matter what the reason is, the cost principle states that on the balance sheet, the asset maintains its original value.

Current assets aren’t affected very much by the cost principle. Your bank account is a great example of this. Bank accounts are short-term assets. They don’t have the opportunity to gain value like long-term assets do. Some long-term assets that need to fall under the cost principle are heavy machinery and equipment. Both are expected to last for years to come, and can see an increase or decrease in value, depending on the market. They need to be recorded at face value, and are balance sheet items that maintain their original cost.

As with anything, there are exceptions to the cost principle. Liquid assets, like debt or equity investments, are exempt from the cost principle. These assets are intended to be turned into cash. They aren’t used for any other purpose, like machinery or equipment is. All liquid assets are recorded on the balance sheet at their current market values. This means that over time, improvements in market value can be monitored and assessed.

Another exception to the cost principle are accounts receivable. Accounts receivable are displayed as a realizable balance. The realizable balance is the balance expected once the accounts are paid on. As such, the net balance for accounts receivable will fluctuate over time, like liquid assets will.

Appreciation and depreciation are two financial principles that apply to all assets. They are not normally included in the cost principle. However, using specific accounting techniques listed below, they can be taken into account. These processes are required to account for any changes that occur.

Asset Appreciation

Appreciation of an asset occurs when the value of the asset increases. When reviewing the worth of assets, appreciation is treated as a gain. The difference of the asset’s current worth and the original cost is recorded as a “revaluation surplus.” This can add net worth to a business over time if assets continue to appreciate.

Asset Depreciation

Depreciation is the exact opposite of appreciation, and most assets undergo it. Depreciation is when an asset loses value over time. There are many different ways to calculate depreciation. Regardless of the method used, depreciation is treated as a loss. It is expensed throughout the asset’s useful life.

There are some other accounting methods that can be compared to the cost principle. The two below are the best for comparison, and highlight where the cost principle can fall short.

Historical Cost Vs Asset Impairment

Asset impairment and depreciation are similar, but they apply to different aspects of a business’s assets. Depreciation occurs because of wear and tear. This wear and tear happens over long periods of use, and causes the asset to lose value. Impairment happens to other assets. These are normally the intangible assets.

Goodwill is one of the assets that asset impairment occurs with. Asset impairment indicates that an asset’s fair market value has dropped below what it was originally listed as. Asset impairment charges occur when companies restructure. This is due to the revaluation of intangible assets, allowing the company to make better business decisions.

In this example, goodwill must be tested annually for impairment. If it is worth less than the value on the books, then the goodwill is considered to be impaired. If it has risen in value, then no changes are made to the historical cost. This is an example of how cost principle can be detrimental in terms of asset appreciation. It is also an example of how it is advantageous when it comes to depreciation.

Historical Cost Vs Mark-to-Market

Mark-to-market is a more modern accounting method. It is more involved than the historical cost method, though. Mark-to-market is also known as fair value accounting. In this method, assets are recorded at their current market value. This means that the value of an asset changes over time. As the name implies, the value changes based on the current market conditions. As such, there is a deviation from the cost principle. This deviation is a helpful figure. It can be used when reporting on assets that have been held in anticipation of sale.

Using the market value of an asset can be very useful. When you’re looking to predict cash flow for your business, the amount of money to be made from selling assets is important. The mark-to-market method allows for this calculation.

An example of a mark-to-market asset is marketable securities. Marketable securities are often held, waiting to be sold at the right moment. These assets move up and down with the market. This means that their true value is constantly viewed and reviewed. This allows for an accurate representation of the worth of the company’s assets. Mark-to-market is the most useful when applied to liquid assets. Liquid assets are meant to be held, then sold at the right time.

In Canada, to be GAAP compliant, the cost principle must be used. This means that the historical cost principle must be used to maintain compliance in accounting in Canada. In addition to this, there are some benefits to using the cost principle, as well. Both benefits and drawbacks of the cost principle are explained below.

The below areas are some of the benefits of using the cost principle for your business.

A Consistent Balance Sheet

If your business is looking for investors or lenders, a consistent balance sheet is important. When you don’t adopt the cost principle, your assets may be subject to volatile market conditions. This means that the overall value of your business will rise and fall. Investors want to put their money into a business that will help them earn their money back. A lender wants to be assured that they’ll be paid back in a timely manner. A consistent balance sheet indicates that to them.

Cost Verification is Simple

If your business’s assets are always recorded at the same cost, then verifying costs is much easier. Verification is easily the most important part of accounting. When you use the cost principle, costs of an asset are always the same. There’s no guesswork when it comes to cost verification. It also means that the value of assets never has to be checked to continue using the cost principle.

Adjustments Aren’t Necessary

If assets are always maintained at the original cost, then adjustments are unnecessary. This means that financial statements are easier to manage overall. Using the fair value method, costs and assets will continue to fluctuate as the market changes. This can make accounting an arduous task to take on.

Assets Have an Objective Value

When using the cost principle, an asset’s value is easy to determine. The only thing required to prove an item’s worth is a document. This document can be a receipt for the purchase of the asset. It can also be an invoice, or bank transaction. The objective value is far easier to determine.

Using the Cost Principle Saves Money

The cost principle is widely regarded as one of the easiest accounting methods to adopt. As such, this means that the professional fees associated with it are lower. When using any other method of valuation for assets, more time is required. To determine the fair market value of an asset, depreciation has to be assessed. Additionally, the market has to be analyzed. This makes it very difficult to determine an item’s value.

On the other hand, the cost principle will always provide an asset’s value in a single figure. This makes it much easier for an accountant to report on. When something is easier, the service surrounding it will cost less money to perform.

While the cost principle seems advantageous, it may not be every business’s best method. In fact, there are many accounting professionals that find the method to be controversial. This is due to a handful of significant disadvantages that come with the cost principle.

A Lack of Accuracy

Because asset values change constantly, using the cost principle can lack accuracy. Assets appreciate and depreciate in value. When you don’t take those fluctuations into account, a business’s financial position is difficult to assess. A business using the cost principle may have far less worth thanks to depreciated machinery. It may be worth far more, too, if assets have risen in value significantly.

Intangible Assets Are Not Recorded

Some of the most valuable assets to a growing business are intangible. When using the cost principle accounting method, none of them are taken into account. Brand identity and intellectual property are two examples of this. These are both built up over time, meaning that they start out with a value of zero. These assets cannot be represented using the cost principle because of this.

The concept of the cost principle can be something that is hard to grasp. It’s hard to picture how something can increase or decrease in value, but still be considered the same value. Here are 5 different examples of the cost principle to help you.

A company paid to build an office building in 2000. The cost to construct the building was $250,000. In 2021, the fair market value of the office building is now $1 million. The company’s balance sheet has not changed, however. The cost of the office building is still listed as $250,000 on the balance sheet.

John’s company purchased a work truck in 2015 for $50,000. Because of depreciation, the vehicle’s value has depreciated significantly. It’s fair market value is now $10,000. On the balance sheet, the work truck is still listed at the original cost of $50,000. In addition to the original cost, the accumulated depreciation is recorded. On the balance sheet, the figure shows up as ($40,000).

A music company purchases the copyright to a movie from an independent filmmaker. The newly purchased asset should be recorded at the cost of the purchase itself. However, because the copyright is an intangible asset, it is not recorded on the balance sheet whatsoever.

Lisa’s company purchased a piece of equipment for the kitchen in 2018 for $15,000. The machinery is highly sought after. However, in 2021, the company is no longer producing it. Because of this, it has increased in value to $21,000. The cost on the balance sheet remains at the original price of $15,000.

A company purchased a piece of machinery for $25,000 in 2010. Over the last 11 years, the machinery’s value has depreciated to around $5,000. The cost of $25,000 is still recorded on the balance sheet, and the depreciation of $20,000 appears as ($20,000) on the statement.

Because the cost principle is commonly used, and often required, most accounting software enables it. As such, the use of the cost principle will typically be built-in. This means that when you purchase assets, they are recorded at the same cost from period to period.

When you’re looking for accounting software, you want something that will allow your business to remain GAAP compliant. This is highly important for your business. The cost principle is a large part of being compliant, and any good software will include it. Additionally, many of these options will allow you to store documents that justify the cost recorded on the balance sheet. If you plan on using the cost principle, plan on using reputable accounting software .

The cost principle can be a frustrating concept to absorb. As such, there are plenty of questions surrounding it. Below are some of the most commonly asked questions regarding the cost principle.

I know that asset appreciation doesn’t show up using the cost principle. Should depreciation still be recorded?

Yes, when using the cost principle, depreciation of an asset still needs to be recorded. Using the cost principle will still record the original cost of the asset. However, most assets depreciate in value over time. The asset’s depreciation should be recorded.

Why should the cost principle be used over fair market value? Isn’t fair market value more realistic?

The cost principle is more important to a company for historical purposes. This is because the price you purchased an asset at may not be the fair market value to another person. Fair market value is a subjective matter. What you purchased an asset for is objective. You have proof of the purchase, and no one can tell you that the value is lower than that.

To put it more simply, the original cost is far more consistent for your books. If you were to use the fair market value, the value of some assets could change from day to day. In some cases, it may be dynamic enough to change from hour to hour. Therein lies the issue with fair market value – it isn’t predictable. Accounting likes to be predictable, with the exception of intangible assets and liquid assets.

Why is the cost principle important?

The cost principle is a way to record an asset’s cost, or value. Being able to determine the value of an asset objectively is a consistent accounting method. It is also the easiest way to determine an asset’s value, making it widely accepted among accountants.

What are the other principles of GAAP?

GAAP, or the generally accepted accounting principles, consists of 10 different principles. The cost principle is a large part of GAAP. However, the 10 principles are recorded differently. All 10 principles are listed below for your benefit.

• Principle of Regularity. This translates to the accountant adhering to GAAP rules and regulations as a standard.
• Principle of Consistency. Accountants must use the same standards when reporting financial information. This ensures financial comparability between periods. Using the cost principle is a large part of this.
• Principle of Sincerity. This means that the accountant provides an accurate depiction of a company’s financial state to the company.
• Principle of Permanence of Methods. Accountants must use the same financial procedures when reporting financial information. This also includes using the cost principle.
• Principle of Non-Compensation. All positives and negatives must be reported accurately.
• Principle of Continuity. When valuing assets, the accountant must assume that the business is going to continue to operate.
• Principle of Prudence. This means that financial data will be reported based on facts, not speculation.
• Principle of Periodicity. All information being recorded needs to be reported during the relevant accounting period.
• Principle of Materiality. Accountants should fully disclose financial data and accounting information in their reports.
• Principle of Utmost Good Faith. This means that all parties involved in the accounting process should be honest in all transactions.

Why is the cost principle used?

The cost principle is used for two reasons. It makes asset values objective, and it is easier to report on than other methods. This makes it highly appealing for businesses of all sizes.

Why do costs need to be verified? How does this apply to the cost principle?

In the world of accounting, costs need to be verified so that books can be balanced. As such, methods of verification need to be available for assets. When using the cost principle, costs are verified by their entries on the books. These entries are normally accompanied by a document, like a receipt or an invoice. As such, the documentation required for the cost principle is easy to provide. Most accounting programs provide record keeping for this purpose specifically.

When using other methods of accounting, like fair market value, cost verifications can be harder to provide. If you’re trying to prove the value of an item or a cost using fair market value, substantial work is involved. This can include current value for similar items, inspection on the wear and tear, and a professional appreciation. This is costly, and can be a difficult task for any business.

Can the cost principle be used for bartered assets?

This is an interesting question. Using assets that are acquired without purchase can be a challenge when using the cost principle. It can be used when trading something in, like a vehicle. The cost would be recorded as the value offered by the dealership for the trade-in, as well as the cash paid on top.

If an asset is inherited, it will act like a liquid asset, or an intangible asset. Effectively, it would have no value as an asset on the balance sheet. This is because a cost is required to document such things. When obtaining an asset, make sure that it is documented. Otherwise, it doesn’t fit into the cost principle accounting model.

How do appreciation and depreciation affect the cost principle?

The cost principle is only affected by depreciation. This is a practical method of accounting when considering depreciation and its effects on the business. It allows the value of an asset to remain the same over its useful life. This is a great thing for any assets that may depreciate over time.

The cost principle becomes impractical when you have assets that appreciate in value. When you have an asset that increases in value over time, there is no way to make the balance sheet equal. The cost principle relies on this balancing act to be effective. Because appreciation adds value, it begins to outweigh the cost (or the value) of the asset. This is avoided in depreciation, because the amount of depreciation can be listed equally on the balance sheet.

The cost principle, also known as the historical cost principle, is a commonly used accounting method. It focuses on keeping balance sheets consistent over time, and assigns a constant value to assets. Because of this, it makes accounting easy. Other methods that can be used are the fair market value, as well as the asset impairment method. However, these aren’t GAAP compliant.

When using the principle cost method, good accounting software is key. Being able to keep all costs consistent over time, as well as house documents for verification, is key. As such, be sure to find good software that works for you and your accountant. We offer a free trial of our accounting software which will allow you to use the cost principle. Additionally, if this article was helpful to you, we’ve got more like it! Be sure to check out our resource hub for everything finance and business related. New content is added all the time, so be sure to check it frequently.

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Cost Accounting

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

Fact Checked

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Table of Contents

Cost accounting is concerned with the collection, processing, and evaluation of operating data in order to achieve goals relating to internal planning, control, and external reporting.

In this definition, examples of “operating data” include the cost of products, operations, processes, jobs, quantities of materials consumed, and labor time used.

Role of Cost Accounting in Cost Control

Cost accounting helps to achieve cost control through the use of various techniques, including budgetary control , standard costing , and inventory control .

Each item of cost (namely, materials , labor , and expenses ) is budgeted at the beginning of the period and actual expenses incurred are compared with the budget .

Any variance between the targets and the actual results are analyzed and, where necessary, corrective actions are taken. This increases the efficiency of the enterprise.

Cost Accounting: Explanation

Cost accounting calculates costs by considering all factors that contribute to the production of the output, including both manufacturing and administrative factors.

The objective of cost accounting is to help a company’s management fix prices and control production costs .

In essence, cost accounting is used for internal management purposes, but it also provides information for external reporting.

Production planning and scheduling, inventory planning and management, and labor time and labor cost budgets are some of the areas in which a company’s management team benefits from the application of a cost accounting system.

Cost accounting also provides information to management regarding actual results (e.g., departmental outputs, actual labor costs, and the cost of materials in process).

It is also worth noting that cost accounting collects data both in monetary and non-monetary terms. In turn, these data are compared to pre-established standards and budgets to exercise management control over the company’s operations.

Scope of Cost Accounting

1. determination and analysis of cost.

The main objective of cost accounting is to determine the cost of products or services rendered. This involves:

• The collection and analysis of expenses
• The measurement of the production of different products at different manufacturing stages
• Linking up production with expenses

Cost accounting records cost and income information for each department, process, job, and sales territory, where the aim is to ascertain the cost and evaluate the operating efficiency of each division of the business.

2. Cost Control

In the age of competition, the objective of a business is to maintain costs at the lowest point with efficient operating conditions.

This requires an examination of each individual item of cost in the light of the services or benefits obtained, which ensures the maximum utilization of money expended or its recovery.

To achieve this, planning and use of the standard for each item of cost is needed, which ensures that deviations can be identified and, accordingly, and corrected.

3. Aligning Cost With Revenue

Cost accountants prepare monthly or quarterly statements to reflect the cost and income data associated with the period’s sales .

4. Assisting Management

Cost accounting enables a business not only to ascertain what various jobs, products, and services have cost but also what they should have cost. It locates losses and wastages , thereby helping to avoid them in the future.

Another way in which cost accounting assists management is that special cost studies and investigations play a role in setting policies and formulating plans for profitable operations.

Principles of Cost Accounting

The principles of cost accounting are as follows:

1. Cost accounting systems aim to work out the cost of producing goods and services soon on completion and not long after production.

2. Cost accounting also aims to attribute all costs to individual products that are manufactured and sold (or with services generated and sold). This process consists of two features:

• Classifying costs as direct and indirect in relation to specific products
• The remaining costs are classified as direct and indirect to departments and, from there, costs are charged to products

3. Cost accounting utilizes several cost classification approaches to suit different managerial needs.

4. A number of costing methods and techniques are used for costing products, cost control, and managerial decisions.

5. Only normal costs form part of the cost of production. Abnormal costs are regarded as losses.

6. Although cost accounting—particularly the integrated system of accounting —can ultimately produce financial statements (i.e., profit and loss account and balance sheet ), its emphasis is on managerial accounting.

7. Cost accounting becomes a vehicle for producing accounting data that can help management execute its functions, and it also enforces accountability. Thus, cost accounting must be built around the company’s organizational structure .

Costing vs. Cost Accounting

It is clear that cost accounting provides the basis on which costing is made possible. Cost accounting provides the necessary cost data that can be used for the purpose of costing. Without cost accounting, therefore, costing is not possible.

A small manufacturer may be in a position to perform costing without the help of cost accounting, but large manufacturers will generally be unable to do this effectively without the help of a cost accounting system.

Cost accounting is a broader term compared to costing. It assimilates in itself the functions of costing, which certainly is a narrower term. In a broader sense, however, the terms are used interchangeably.

Cost accounting makes a provision for the analysis and classification of expenditure . It then enables the management to ascertain the total, as well as the per-unit cost, of a particular unit of production. It also discloses the constituents of the total cost.

The ascertainment of cost and the provision of knowledge about its constituents are the two broad objectives of costing. Therefore, both terms can be used—and often are used—in the same sense.

Importance of Cost Accounting

Cost accounting assists a company’s management team in carrying out its day-to-day functions of control and formulating business policies.

Through cost accounting, the management learns about the causes of losses and wastages. As such, cost accounting is, as a matter of fact, a valuable aid to managerial control.

The importance of cost accounting is a function of the seven points discussed below.

Costs are classified and sub-divided to provide management with all the details relating to the expenditures incurred to produce a product or render a service.

These details enable the management team to eliminate or to pull back on any activities that do not generate a sufficient amount of profit .

The perpetual inventory system , setting up labor efficiency standards, and classifying overheads (as fixed, variable, or uncontrollable) are a few of the methods that help management to exercise control over costs and take suitable control measures.

3. Setting Up Standards to Measure Efficiency

Standards are established and used to measure the efficiency not only of labor but also every other production factor. Estimates and plans are provided, which are compared with the actual results and deviations to develop corrective measures.

4. Provision For Budgets, Plans, and Other Aids

Estimates, plans, budgets, and other aids are provided to management to compare the desired results and the actual results.

Certainly, this not only helps in coordinating efforts but also in setting targets and achieving organizational goals.

5. Price Determination

Unit-wise details of costs, their components, and the accuracy of calculations and cost data, which are made available by the costing department, go a long way in helping to determine product and service prices.

6. Special Factors

These factors are specially taken care of and management is kept posted with all developments, including any factors that have arisen and their causes.

This enables the company’s management team to guard the enterprise against any eventuality.

Either the management is able to take effective measures to save itself from disaster or it can keep those factors away from its own establishment.

Depressions, seasonal fluctuations, and idle time (for labor and machines) are a few of the special factors that must be guarded against. Cost accounting keeps the management team well informed about these factors.

7. Policies: Business and Others

Cost accounting is not only an aid to the whole business and its various activities; it is also helpful in arriving at a fruitful business policy, as well as other policies that the business and its future depend on.

Cost accounting seldom fails a company’s management team and, consequently, the enterprise.

It is certainly a very important aid since it has become an essential tool used by management.

Specifically, cost accounting serves management in executing policies and offers scope to make policies flexible, ensuring that the desired results can be achieved without any significant difficulties or disruptions.

Why Is Cost Accounting Necessary?

The above discussion leads us to the conclusion that cost accounting is a systematic procedure for determining per-unit costs. It serves, therefore, the purposes of both ascertaining costs and controlling costs.

Cost accounting is necessary for businesses due to the advantages it offers, which include:

• It ascertains the costs of each product, process cost center, and department
• It assists in cost classification and analysis
• It provides details about all the factors influencing product or service costs
• It provides a system for cost control
• It provides sufficient cost data for management to make vital decisions in the best interest of the enterprise as a whole
• It provides information to all interested parties (e.g., trade customers, banks , shareholders, associations, unions, governments, insurance companies , etc.)

Cost Accounting FAQs

What is cost accounting.

Cost accounting is a form of managerial accounting that aims to record, analyze and report the costs associated with running an organization or project. It involves tracking expenses such as labor, materials, administration costs, and other related overhead to provide accurate financial information for decision-making.

How Does Cost Accounting Help a Business?

Cost accounting helps businesses understand where their money is being spent and how this expenditure affects their bottom line. It can be used to set pricing models, manage budgets, allocate resources more efficiently, identify areas of potential savings, and compare performance against competitors.

Who Uses Cost Accounting Data?

Cost accounting data is typically used by internal stakeholders within a business such as managers and executives who are responsible for decision-making related to budget and resource allocation. Additionally, external parties such as investors and lenders may utilize cost accounting data to help evaluate projects or investments.

What Are the Different Types of Cost Accounting?

The two main types of cost accounting are activity-based costing (ABC) and traditional costing. ABC assigns costs to activities based on their consumption of resources, whereas traditional costing assigns costs directly to products for manufacturing or services for delivery.

How Can a Business Benefit from Cost Accounting?

Adopting cost accounting can provide numerous benefits to businesses including increased visibility into spending and improved financial forecasting accuracy which helps inform smarter decisions related to pricing and budgeting. In addition, cost accounting can also be used as a tool for benchmarking performance against competitors and identifying potential areas of savings.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

Related Topics

• ABC Analysis
• Abnormal Spoilage
• Account Analysis Method
• Activity-Based Costing (ABC) Principles, History & Steps
• Actual Overhead Rate and Pre-Determined Overhead Rate
• Administrative Overheads
• Advantages of Cost Accounting
• Applications of Cost-Volume Profit (CVP) Analysis
• Apportionment of Joint Cost of Materials
• Assumptions and Limitations Underlying CVP Analysis
• Backlog Depreciation
• Batch Costing
• Blanket Absorption Rate and Departmental Absorption Rate
• Break-even Point
• By-Products
• Calculating the Machine Hour Rate
• Calculation of Depreciation Adjustment Under the Current Cost Accounting Technique
• Characteristics of an Ideal System of Cost Accounting
• Classification and Codification of Materials
• Committed vs Discretionary Fixed Cost
• Comparison Between Cost Accounting and Financial Accounting
• Computation of Unit Cost Under Activity-Based Costing
• Constant Gross-Margin Percentage NRV Method
• Contract Account
• Contract Costing
• Contribution Margin
• Contribution Margin Ratio
• Control-Factor Unit
• Cost Accountancy
• Cost Accounting Cycle

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12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

• The name and location of your company
• Products and services offered by your company
• Mission and vision statements
• Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

• Business location
• The legal structure of your business
• Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

• The geographical location of your target market
• Needs of your target market and how your products and services can meet those needs
• Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

• Industry description and statistics
• Demographics and profile of target customers
• Marketing data for your products and services
• Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

• Your competitors' identified advantages in the market
• How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
• The standout qualities that distinguish you from other companies
• Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

• Information about how your company plans to carry out its operations.
• The base location from which your company intends to operate.
• The number of employees to be utilized and other information about your company's operations.
• Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

• Projected income statements
• Cash flow statements
• Balance sheets
• Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

• Legal documents
• Licenses and permits
• Credit histories
• Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

• The management team and other stakeholders resume
• Marketing research
• Permits and relevant legal documents
• Financial documents

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Kamala Harris has an ambitious plan to build 3 million new homes. She'll have to get through Congress and local NIMBYs first.

• Kamala Harris unveiled a housing plan that includes building three million homes in four years.
• Her plan includes tax incentives for builders to construct small and affordable homes.
• Harris' supply-boosting policies could get the most traction among Republicans, but it'll be an uphill battle.

Democratic presidential nominee Kamala Harris unveiled some of her major economic priorities in a speech in North Carolina last week.

Central to her agenda is a plan to make housing more affordable — an issue that's become increasingly urgent for millions of Americans amid a housing supply shortage and skyrocketing prices . Part of Harris' plan involves spurring the construction of lots of new housing through policy changes and subsidies. But barriers to new construction abound — from an often-gridlocked Congress to state and local leaders and communities.

Harris has pledged to build three million homes across the country during her first term as president. She wants to offer tax incentives for home builders to construct starter homes — smaller, more affordable units — for first-time homebuyers. She would also expand a current tax credit for businesses that build affordable rental housing. And Harris says she would double the Biden administration's $20 billion housing innovation fund intended to support local governments and developers looking for new ways of building affordable housing. Last, the campaign called for a reduction in "red tape and needless bureaucracy" that stalls new construction.

These three million new homes would be in addition to the homes developers would otherwise construct, The Wall Street Journal reported .

Jenny Schuetz, an expert in urban economics and housing policy at the Brookings Institute, told Business Insider that while a goal for new home construction is helpful, it's not necessarily an accurate prediction.

"There's no way that the government can guarantee X number of homes are going to get built," Schuetz said. But, she added, "putting the number out there and then marking progress is actually quite helpful."

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Aside from incentivizing new housing construction, Harris' plan includes a proposal to crack down on investors buying up homes in bulk and landlords from using rent-setting algorithms "to collude with each other and jack up rents."

The campaign also proposed expanding the Biden administration's assistance for first-time homebuyers, proposing an average of $25,000 in downpayment support for first-time buyers.

A spokesperson for the Harris campaign didn't immediately respond to a request for comment.

Harris' plan focuses more on boosting the supply of housing than the current administration has. The federal government has traditionally focused its housing policy on demand-side subsidies like housing vouchers. Schuetz and other housing experts are glad to see this shift, noting that a housing shortage is the central cause of the affordability crisis.

There is some bipartisan agreement on housing policy. At the state level, Republican lawmakers have successfully cut red tape to spur home construction. But boosting federal funding and shifting strategies won't be easy in a bitterly divided Capitol.

"Acknowledging that this is a problem isn't the same thing as saying we've got a magic wand that will allow us to solve it," Schuetz said.

Barriers to action

Most of Harris' housing plan would require support — and lots of new funding — from Congress. The WSJ reported that the tax credits for starter homes and affordable housing construction would cost about $80 billion combined. And getting Congress to agree on anything is a serious challenge.

Andy Winkler, director of housing and infrastructure projects at the Bipartisan Policy Center, noted that while there isn't much Republican support for demand-side housing policies like Harris' downpayment assistance program, some of the supply-side measures could get bipartisan backing.

He's most optimistic that expanding the Low Income Housing Tax Credit and other supply-side, tax-based policies could pass Congress as it debates tax reform in 2025. But he's skeptical the reforms Harris could get through would result in three million new homes in four years — a goal he called "pretty ambitious."

"I have trouble foreseeing a sweep election, so if either the House or the Senate has a Republican majority, I think the tax policies are where you could see the most potential," Winkler said.

On top of getting Congress on board, a Harris administration would need states and municipalities to reform many layers of land-use regulations and other housing-related policies to make way for new construction. Many of the policies that restrict housing construction — including land-use laws like zoning — are controlled by local and state governments, meaning the federal government's influence over those policies is limited.

The White House and Congress can use federal subsidies to incentivize local officials to loosen regulations and otherwise spur construction, but they can't force this action. And there is often lots of local opposition that significantly slows down or halts all kinds of development.

While Republicans in Congress might be interested in cutting red tape at the local and state levels, the devil's in the details, Winkler said.

"It's really difficult from the federal level to incentivize those behaviors," he said.

Watch: Can Kamala Harris win over Democrats after Joe Biden drops out of 2024 presidential election?

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Harris and Trump Have Housing Ideas. Economists Have Doubts.

The two presidential nominees are talking about their approaches for solving America’s affordability crisis. But would their plans work?

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By Jeanna Smialek and Linda Qiu

America’s gaping shortage of affordable housing has rocketed to the top of voter worry lists and to the forefront of campaign promises, as both the Democratic nominee, Kamala Harris, and the Republican candidate, Donald J. Trump, promise to fix the problem if they are elected.

Their two visions of how to solve America’s affordable housing shortage have little in common, and Ms. Harris’s plan is far more detailed. But they do share one quality: Both have drawn skepticism from outside economists.

Ms. Harris is promising a cocktail of tax cuts meant to spur home construction — which several economists said could help create supply. But she is also floating a $25,000 benefit to help first-time buyers break into the market, which many economists worry could boost demand too much, pushing home prices even higher. And both sets of policies would need to pass in Congress, which would influence their design and feasibility.

Mr. Trump’s plan is garnering even more doubt. He pledges to deport undocumented immigrants, which could cut back temporarily on housing demand but would also most likely cut into the construction work force and eventually limit new housing supply. His other ideas include lowering interest rates, something that he has no direct control over and that is poised to happen anyway.

Economist misgivings about the housing market policy plans underline a somber reality. Few quick fixes are available for an affordable housing shortfall that has been more than 15 years in the making, one that is being worsened by demographic and societal trends. While ambitious promises may sound good in debates and television ads, actual policy attempts to fix the national housing shortfall are likely to prove messy and slow — even if they are sorely needed.

Here’s what the candidates are proposing, and what experts say about those plans.

Harris: Expand Supply Using Tax Credits.

Ms. Harris is promising to increase housing supply by expanding the Low-Income Housing Tax Credit, providing incentives for state and local investment in housing and creating a $40 billion tax credit to make affordable projects economically feasible for builders.

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