Starting a business? You should write a business plan, even if you’re not raising money any time soon. A business plan is not just a document. We all know the importance of forward planning, but many entrepreneurs and small business owners fail to prepare even the most basic of business plans.
It is a holistic analysis of your company, the environment it operates in, and a route map to achieving success based on the resources available. Unfortunately, the image most of us have is of a 30-page bound document. The focus is on ‘the output’ when the real value in a business plan is the business-planning process itself. Business planning is an essential element of running any successful business, particularly given the growing uncertainty all businesses face coupled with ongoing changes in consumer behavior.
Here are five reasons why business planning is so important:
1. To plan for an uncertain future
Business planning is vital to help you manage your business more effectively. By committing your thoughts to a plan, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can also detail alternative future scenarios, set specific objectives and goals, and list the resources required to achieve these goals. In short, it can help ensure that you are prepared for all sorts of eventualities.
2. To help grow your business
In an ideal world, all businesses would be self-financing in exploiting business opportunities. In reality, few are afforded this luxury, and hence, will be required to secure external investment eventually. The production of a credible business plan is one of the primary requirements for any entrepreneur seeking investment to grow.
3. To commit to a particular course of action
A business plan can help a company assess future opportunities, choose one, and then commit to a particular course of action. By committing to one opportunity, all other options are effectively marginalized and the company is aligned to focus on key deliverables.
4. To help manage cash flow
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.
5. To support 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.
What Should a Business Plan Cover?
Your business plan can be as simple or as in-depth as you need it to be. The kind of encyclopedic, statistic-filled report required by banks and other lenders and financial organizations are rarely relevant to lone entrepreneurs or small business owners. A simple overview of your business can be enough to help you reach a greater understanding of its machinations and run things more effectively.
As well as being a resource you can use to introduce your business to potential clients, a written description of your business will allow you to easily share your vision, strategies and methods with other partners, employees and any outsourced staff.
In one study, the Kauffman Centre for Entrepreneurial Leadership found that companies with written business plans had 50% greater sales growth and 12% higher gross profit margins than companies without plans. The conclusion? Understanding your business inside out and coherently setting out a strategy for success are both key elements of progress and accomplishment.
Any good business plan should broadly consider these fundamental areas:
- An analysis of your industry
- Who your competitors are likely to be
- Who will comprise your target/ideal customer or client
- Exactly what services and/or products you intend to offer
- How you will market your business (launch and continued)
- Any problems you may encounter and how you would deal with them
By gaining an understanding of these elements you will be better placed to consider the financial components of your business plan. Budgeting, setting out costs and projecting profits early on will help you immensely by providing measurable and calculable figures for reference as you grow your business.
The core value in a business plan lies in the business planning process itself. Business planning is an essential process of running any successful business and preparing for the future – however uncertain or incalculable – can help safeguard your company.
A business plan is not just a document, it is a useful analysis of your company and a road map to achieving success and attaining your end goal. It is a manual you can refer back to for reassurance in lean times or when things go wrong.