Why Do You Need a Business Plan?

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It’s frequently said that if you don’t plan for the future then you must be planning to fail. Hence, it’s fair to say that a business plan is widely regarded as a very important–essential, even–management tool.

A business plan is a written document that describes where you want your business to be in the future along with the resources you anticipate needing to achieve your goals for the business. These resources can take the form of financial funding (loans etc.), headcount, capital asset acquisitions, etc.

In short, a business plan describes what you want to do and how you plan to do it.

In addition, a business plan conveys:

  • your business goals
  • the strategies you’ll use to meet them
  • potential problems that may confront your business
  • ways to solve those problems
  • the organizational structure of your business (including titles and responsibilities)
  • the amount of capital required to finance your venture and keep it going until it breaks even

As explained by Entrepreneur, without a business plan it’s fair to say that you will be taking pot-shots in the dark without having anything to aim at.

A business plan is a living and breathing document in the sense that conditions can arise necessitating an update to the plan. The business plan is not something that is cast in stone. Updates may be required for reasons such as the following:

  1. A new financial period is about to begin. You may update your plan annually, quarterly or even monthly if your industry is a fast-changing one.
  2. You need financing. Lenders and other financiers need an updated plan to help them make financing decisions.
  3. There’s been a significant market change. Shifting client tastes, consolidation trends among customers and altered regulatory climates can trigger a need for plan updates.
  4. Your firm develops or is about to develop a new product. If your business has changed a lot since you wrote your plan the first time around, it’s time for an update.
  5. You have had a change in management. New managers should get fresh information about your business and your goals.
  6. Your old plan doesn’t seem to reflect reality any more. But if your plan seems irrelevant, redo it.

Is a Business Plan Essential? The Statistics Say Yes

The following two examples provide a more practical, detailed glimpse into why business plans are so essential and why the statistics show how game-changing a good plan can be:

Example 1 (from QuickBooks.com):

A few years ago, a software company surveyed its users to determine how helpful a business plan was to success. The results were reviewed by the University of Oregon for validation, and seem to point to the improved outcomes for those with business plans:

  • Of those who created plans, 64 percent grew their businesses, compared to 43 percent of companies that hadn’t yet finished a plan.
  • Those who created plans were more likely to secure a loan or investment capital.

A Babson College study discovered a written business plan wasn’t all that important — unless you were trying to raise money. In cases involving raising capital or getting a loan, businesses with plans were more likely to get the funding they needed.

Example 2 (from BPlans.com):

Palo Alto Software asked thousands of Business Plan Pro users a couple of dozen questions about their businesses, goals, type of business, years in existence, and business planning. Almost 3,000 people responded. Those who finished their business plans were about twice as likely to successfully grow their business, get investment, or land a loan than those who didn’t.

Key Elements To A Business Plan

An analysis by Mary-Ellen Tribby, CEO and Founder of WorkingMomsOnly.com, as published by The Huffington Post, made these pertinent observations:

  1. Executive Summary: Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. Clearly state what you’re asking for in the summary. The statement should be kept short and businesslike. Within the space of the Executive Summary, you’ll need to provide a synopsis of your entire business plan.
  2. Market Analysis: This section should illustrate your knowledge about the particular industry your business is in.

A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to collect its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and marketing strategies that will allow the company to become profitable within a competitive environment.

  1. Company Description: Include a high level look at how all of the different elements of your business fit together.
  2. Organization and Management: This section includes your company’s organizational structure, details about the ownership of your company, descriptions of your management team and qualifications of your panel of experts or board of directors.
  3. Marketing and Sales Strategies: Marketing creates customers and customers generate sales. In this section, define your marketing strategies. Start with strategies, tactics and channels that you have used to create your greatest successes.
  4. Service and/or Product Line: In this section describe your service and product. What is it that you are actually selling? Establish your unique selling proposition.
  5. Funding Requirements: In this section state the amount of funding you will need to start or expand your business. Include best and worst case scenarios.
  6. Financials: Develop the financials AFTER you have analyzed the market and set clear objectives. You should include three to five years of historical data.

In conclusion, it’s fair to say that creating a business plan can be a significant undertaking. But there is plenty of evidence that the effort will reap dividends, so to speak, in terms of growth, profitability, and overall success.