Reasons for a business plan:
- To show seriousness: To prove to all interested parties/stakeholders (employees, investors, partners, and yourself that you’re serious about your business and you are committed to building the business.
- To map the future: A business plan helps you manage your business effectively. By putting your thoughts on paper, you are able to understand your business better and take specific courses of action that need to be taken to develop your business. A plan equips you to set specific objectives and goals along with the resources required to achieve these goals.
- To support growth and secure funding
Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. However, despite the fact that the market for funding is highly competitive, all prospective lenders will require access to the company’s recent Income Statements/Profit and Loss Statements, along with an up-to-date business plan. In essence the former helps investors understand the past, whereas the business plan helps give them a window on the future.
When seeking investment in your business, it is important to clearly describe the opportunity, as investors will want to know:
- Why they would be better off investing in your business, rather than leaving money in a bank account or investing in another business?
- What the Unique Selling Proposition (USP) for the business arising from the opportunity is?
- Why people will part with their cash to buy from your business?
A well-written business plan can help you convey these points to prospective investors, helping them feel confident in you and in the thoroughness with which you have considered future scenarios. The most crucial component for them will be clear evidence of the company’s future ability to generate sufficient cash flows to meet debt obligations, while enabling the business to operate effectively.
To establish business milestones. The business plan should clearly lay out the long-term milestones that are most important to the success of your business. To paraphrase Guy Kawasaki, a milestone is something significant enough to come home and tell your spouse about (without boring him or her to death). Would you tell your spouse that you tweaked the company brochure? Probably not. But you’d certainly share the news that you launched your new website or reached $1M in annual revenues.
To better understand your competition. Creating the business plan forces you to analyze the competition. All companies have competition in the form of either direct or indirect competitors, and it is critical to understand your company’s competitive advantages.
To better understand your customer. Why do they buy when they buy? Why don’t they when they don’t? An in-depth customer analysis is essential to an effective business plan and to a successful business.
To enunciate previously unstated assumptions. The process of actually writing the business plan helps to bring previously “hidden” assumptions to the foreground. By writing them down and assessing them, you can test them and analyze their validity.
To assess the feasibility of your venture. How good is this opportunity? The business plan process involves researching your target market, as well as the competitive landscape, and serves as a feasibility study for the success of your venture.
To document your revenue model. How exactly will your business make money? This is a critical question to answer in writing, for yourself and your investors. Documenting the revenue model helps to address challenges and assumptions associated with the model.
To determine your financial needs. Does your business need to raise capital? How much? The business plan creation process helps you to determine exactly how much capital you need and what you will use it for.
To attract investors. A formal business plan is the basis for financing proposals. The business plan answers investors’ questions such as: Is there a need for this product/service? What are the financial projections? What is the company’s exit strategy?
To reduce the risk of pursuing the wrong opportunity. The process of creating the business plan helps to minimize opportunity costs. Writing the business plan helps you assess the attractiveness of this particular opportunity, versus other opportunities.
To force you to research and really know your market. What are the most important trends in your industry? What are the greatest threats to your industry? Is the market growing or shrinking? What is the size of the target market for your product/service? Creating the business plan will help you to gain a wider, deeper, and more nuanced understanding of your marketplace.
To attract employees and a management team. To attract and retain top quality talent, a business plan is necessary. The business plan inspires employees and management that the idea is sound and that the business is poised to achieve its strategic goals.
To plot your course and focus your efforts. The business plan provides a roadmap from which to operate, and to look to for direction in times of doubt. Without a business plan, you may shift your short-term strategies constantly without a view to your long-term milestones.
To attract partners. Partners also want to see a business plan, in order to determine whether it is worth partnering with your business. Establishing partnerships often requires time and capital, and companies will be more likely to partner with your venture if they can read a detailed explanation of your company.
To position your brand. Creating the business plan helps to define your company’s role in the marketplace. This definition allows you to succinctly describe the business and position the brand to customers, investors, and partners.
To judge the success of your business. A formal business plan allows you to compare actual operational results versus the business plan itself. In this way, it allows you to clearly see whether you have achieved your strategic, financing, and operational goals (and why you have or have not).
To reposition your business to deal with changing conditions. For example, during difficult economic conditions, if your current sales and operational models aren’t working, you can rewrite your business plan to define, try, and validate new ideas and strategies.
How are you going to reach your customers? How will you retain them? What is your advertising budget? What price will you charge? A well-documented marketing plan is essential to the growth of a business.
To understand and forecast your company’s staffing needs. After completing your business plan, you will not be surprised when you are suddenly short-handed. Rather, your business plan provides a roadmap for your staffing needs, and thus helps to ensure smoother expansion.
To uncover new opportunities. Through the process of brainstorming, white-boarding and creative interviewing, you will likely see your business in a different light. As a result, you will often come up with new ideas for marketing your product/service and running your business.
To develop and communicate a course of action
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalized and the company is aligned to focus on key activities. The plan can assign milestones to specific individuals and ultimately help management to monitor progress. Once written, a plan can be disseminated quickly and will also prompt further questions and feedback by the readers helping to ensure a more collaborative plan is produced.
Careful management of cash flow is a fundamental requirement for all businesses.
The reason is quite simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point–where total revenue equals total costs–is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important.
Cash flow management then becomes more vital when businesses pursue investment opportunities where there are significant cash out flows, in advance of the cash flows coming in. These opportunities need to be assessed against any seasonal variations in the business and the timing of the flows. If you are a “cash-only” business, you can bank the income immediately; however, if you sell on credit, you receive the cash in the future and hence may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency and hence a well structured business plan will help you manage funding requirements in advance.
For a strategic exit
Finally, at some point, the owners of the firm will decide it is time to exit. Considering the likely exit strategy in advance can help inform and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.
Common exit strategies include;
- Initial Public Offering of stock (IPO’s)
- Acquisition by competitors
- Family succession
- Management buy-outs
Investment decisions can be taken in the present with one eye on the future via a well-thought-out business plan. For example, if the most attractive exit route appeared to be selling to a competitor, present day management and investment decisions could focus on activities that would increase the company’s attractiveness to that competitor.
Given that valuing firms is notoriously difficult and subjective, a well-written plan will clearly highlight the opportunity for the incoming investors, the value of it and increase the likelihood of a successful exit by the current owner.