Do I Really Need A Business Plan?
In short, YES. Heres why.
The Purpose of a Business Plan
A well developed business plan is the roadmap to success for your venture, whether its a new business or its been around some time. Its a document that describes what you plan to do and how you plan to do it.
As your business plan must inform the readers about aspects of your business which they dont already know or with which they are unfamiliar, perhaps a better question, therefore, is What form should my business plan take?
What form should my business plan take?
The answer will depend upon your intended audience. At the very least a business plan should prove that your business will generate enough revenue to cover your expenses, so lets start with you.
The Entrepreneur
Suppose youre starting a small business that you will run, fund and manage yourself. As an owner/manager you definitely need a plan, but the formality, length and complexity of it can vary. In many cases, a full-blown strict business plan may not be necessary. However, before celebrating the fact that you think you dont have to write a business plan (after all, theres not much you dont know about your own business, is there...?), lets think for a moment about the situations when you should take the time to develop a knockout business plan. Three (there are many more) spring immediately to mind. You MUST have a business plan if you:
* Plan to apply for a loan or approach investors for financial backing,
* Will incorporate as a limited company and have a board of directors to report to, or
* Are starting the business with someone else.
If those situations dont apply to you, then you can probably squeeze by without a formal business plan and still develop a successful business. However, you must remember that there are aspects of your business and the environment in which it will operate that you may not be as familiar with as you should.
This fact alone should prompt you to write a business plan. The discipline of researching those areas you are not familiar with significantly increase your knowledge of the business environment. Experience shows that greater knowledge allows for better management of business risk. For example:
Competitors
How much do you really know about them? For your business to succeed, you need to know almost as much about your competitors as you do about your own company and customers. Unfortunately, many business owners and managers (small and not so small) make the mistake of waiting until a competitor has opened up shop and is cutting into profits to find out who and what they're up against.
A competitive analysis allows you to identify your competitors and evaluate their respective strengths and weaknesses. By knowing the actions of your competitors, you will have a better understanding of what products or services you should offer; how you can market them effectively; and how you can position your business.
Suppliers
As with customers, you really must know as much as possible about your suppliers. Can they fully supply your orders on time, every time? Are they financially robust? Can they support your rate of growth?
To ensure the survival of your business you must have a good knowledge of and a high level of confidence in your supply chain. And as from time to time the worst happens (Murphys Law states that if it can happen, it probably will), you must also have a contingency plan to overcome the effects of a Murphy incident; what is more, you need to plan now. After the event it may be too late.
Partners and Colleagues
If you are writing a plan for your colleagues and partners to expand an existing business, then the focus of your plan may be more operational than financial, concentrating on the resources and assets needed to reach your targets, and the part that each will play in attaining those goals.
Banks
If you are writing a plan for a bank, the most important aspect to the bank manager will be your financials. Are your assumptions realistic? Will the cash flow be enough that you can make the monthly payments for the loan you have requested? If your business is making 10,000 a month and your payments are 12,000 a month, the bank will almost certainly reject your proposal.
Investors
If you are starting a business and intend to raise funds from investors or a financial institution, a solid and comprehensive business plan is required. You wont even get in the door without one.
If you are writing a plan for a venture capitalist, one of the most important factors in a decision to invest in a company is the quality of the people. In property, where the three biggest criteria are location, location and location, the venture capital axiom is people, people and people. VCs will ask how experienced are the people that are going to run this business? Do they have knowledge of the industry? Have they started successful ventures in the past?
Venture capitalists will also want to be sure that your business model is sustainable and scalable so that they can realise a profitable exit within a reasonable timescale.
The Consequences of Poor Planning
Having concluded that every business needs a business plan, that plans are important and valuable because they create greater clarity regarding the direction the business might take and how it will get there, why is it then, that so many small and medium size companies do not have a business plan, even an informal one?
Perhaps you are so immersed in the day-to-day running of your business that you rarely step back to consider where the business should be going and how it should get there. Perhaps you are unclear about just how useful a business plan can be. Or maybe the process of preparing one seems overwhelming. Over the years I have also found planning document that have been carefully prepared and then filed and ignored.
What are the consequences of inadequate business planning?
In this climate of financial uncertainty, one way to appreciate the importance of a business plan is to draw an analogy with house building. Can you imagine the planning that is needed to ensure a successful and profitable completion of your dream home? Firstly there is site location is it in the right spot? Next are planning considerations; is your architect competent and will the Local Authority approve your plans? Once you are over these hurdles you must choose the builder and be sure he can deliver on time and to budget no hidden costs. And then there is the need for contingencies what might the weather be like, what could the ground conditions be like, and so on. With all these factors clearly understood, assessed, and taken into account in detailed plans, the likelihood of a successful completion is significantly improved. Can you imagine trying to build your home without all that planning?
To be successful in your business you too need to understand all the elements of your business and have a game plan to achieve your desired results. You need to put some time into working on your business and not just in it.
So what happens if you dont have a business management plan? If you dont know where you are going, how will you ever get there? Without a plan you are unable to point yourself in the right direction, progress is impossible to measure, and should things go out of kilter or deteriorate, you will be unable to return to your original path or redirect your business along a less rocky road. You will simply end up working harder for less.
What are the warning signs?
The longer term warning signs of not having a plan for the business could show in poor profitability, becoming less competitive, loss of business focus and a miss-match of resources. In the shorter term, you will face indecision, lower productivity, loss of customers, staff and general business apathy.
Guidance
The key elements of a good business plan include setting objectives for the business, identifying what needs to happen for these objectives to be achieved and measuring progress regularly. In developing your plan, make sure you remain objective and collect reliable information about key external trends that will have a major impact on your business.
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