Market research is a cornerstone of the entire business plan. It informs many of the decisions you will make about your business. It is also what will help support many areas of the Business Plan. This is perhaps most evident in the financials. Financial Projections Business Plan are heavily based on Market Research and they have a very close connection.
Understanding Market Research
In order to understand the impact of market research you must first understand what market research entails. In the simplest sense, it is an organized way to gain information about customers. Not only does this include things like looking at consumer data or conducting qualitative analysis, it will also deal with doing research on the overall industry/market, specific locations (if applicable), and competitors.
Understanding Financial Projections in the Business Plan
The financial projections in the Business Plan are the forecast of future positions usually expressed in the format of the three main financial statements. These statements are the income statement, balance sheets, and statement of cash flow. They are presented this way so that they can be used as goalposts, which will be compared to actual results – in this format – later on. This comparison, also called a variance analysis, allows you to carefully compare your expectations to reality and understand why they differ. You can then adjust your expectations for the future and get better at projections and forecasts.
The Connection
If your business already exists and has history, the future Financial Projections for your business plan will still be based on market research. Though, it may be to a lesser degree than when your business is brand new. However, the market, competitors, and consumer preferences are always changing so it will still inform a great deal about your business, even if you have a well-established history.
Competitor analysis will help you determine your own pricing strategy. Pricing is part of the equation to figuring out one of the most basic financial projections, the revenue forecast. The revenue number drives a great deal of the financial projections in the business plan. This includes the break-even analysis, profit & loss statement and the statement of cash flow. It will also be required to project the balance sheet but, not as directly.
The overall size of the market determined in Market Research will inform your maximum potential. If, in a perfect world, there was not competition. That’s why it is so important to understand the competition and how much of the market competitors are reasonably capturing. Many businesses use a small percent of market share as their goal. This, again, is where we can see how market research feeds into financial projections in the business plan.
Conclusion
Although it may be tempting to view market research as independent from Financial Projections Business Plan, that is just not the case. As with many other aspects of the business plan, they are intimately connected. The above only scratches the surface on how one informs the other. The truth is, the entire business plan is one cohesive document. It doesn’t matter how it is split up or what headers are used, all the pieces fit together and have an impact on the other, especially the financial sections.
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