Wednesday, June 2, 2010

Understanding the Importance of a Business Plan for Your Startup

My new blog series is much anticipated and long overdue! I will be discussing the ever-dreaded, but always needed, business plan! Today I will define the business plan, its purpose, the benefits and common misconceptions of the plan. While every business needs a plan, I will focus on the startup plan. Remember that once you have a plan, you must update that plan every year!

What is a Business Plan?

A business plan is the formal documentation of your business concept in its entirety and is typically shared with people outside the organization for the purpose of funding. That is the pretty definition. Starting and defining a business concept is not as easy as it sounds. The business plan is a document that must be built systematically and must answer plenty of questions including:

  • What is the purpose of your organization along with its goals and objectives?
  • What do you plan to sell?
  • How many consumers purchase products like yours (the market size)?
  • What is the state of the industry that you operate within?
  • Who else sells what you sell and why will consumers choose to buy from your organization?
  • How will you promote your business and close sales?
  • How much do you think you will make?
  • Who will run the organization?
  • How will you operate your business within the guidelines set by the regulatory authorities?
  • What risks exist and what is your plan to mitigate those risks?
  • How much money do you anticipate making over the next three to five years?
  • How will you get paid and how will you pay your bills?
  • What is your financial goal and under what assumptions did you formulate your forecasted financial statements?
  • How will you finance your business? How will you recuperate your investment and how long will it take you to be  profitable?
  • What is your business continuation plan?
  • Why would anyone want to invest in your business?

Many entrepreneurs want to just throw the business plan writing over the fence to a consultant, but a viable plan cannot be written without your cooperation. The business plan must be built with your vision serving as the foundation for the plan.

The Purpose of a Business Plan

Your business plan serves several purposes that all intertwine. First, it strategically maps out your business concept and tells the story of why your business concept is a viable idea. Secondly, it serves as a communication tool to let others know what you are planning to do. The audience may be potential business partners, investors, banks and employees. Last, but certainly not least, the plan is used to secure funding. As a matter of fact, 99.9% of the time someone calls me to create a business plan, it is because they are seeking funding. Every time I get a chance, I preach the importance of a plan beyond funding. Your business plan should be a tool that all but guarantees how you can make your business successful.

Benefits of Having a Business Plan

It’s almost easier to tell you the risks of not planning (you are all but guaranteeing failure), than to detail the numerous benefits. But, following are some of the benefits (among many) of having a plan:

  • It aligns your short-term objectives with your long-term goals.
  • It mitigates unforeseen disasters and points out opportunities you did not consider.
  • It lets you know your startup cost, how much is needed to fund the business and when the funding is needed.
  • It lets your funders know why if you are worth the risk.
  •  It builds your confidence!

Misconceptions about the Business Plan

  • One size fits all. While the structure and outline found in a plan are the same, the contents are not. No two businesses have the same plan. While there may be common sections or information (i.e. industry and market profiles), the plan is built on a vision and strategy unique to each owner.
  • Writing a business plan is simple and anyone can do it. The truth is putting together a plan is an arduous and sometimes emotional process. Scoping your big dream down to what you can do today is easier said than done. The idea is yours, but it is almost mandatory to get expert help. If writing and implementing a plan was easy, then we all would be successful entrepreneurs.
  • Writing a business plan is impossible. While a plan is hard, it is not impossible to write. It’s a matter of answering all the questions and presenting information in a clear and concise manner. Even if you have a consultant write your plan, you must still know how to explain it.
  • A business plan guarantees funding. Funding cannot take place without a plan; however, funding a startup depends on more than just the plan. Your company history and your financial credibility also play a vital role. While I have seen good plans supersede any personal flaws, it is important to know that your financial health could make the difference in getting funding.
  • Write a business plan once you are ready to go in business. The most common mistake that potential entrepreneurs make is waiting to start a business plan. The sooner you start your plan, the sooner you will realize your dream. My business concept was in my head for over a decade and I started my plan several years before actually starting my business. Because of this, I actually started sooner than I dreamed!
  • Write a business plan and “hope” it works. You should not consider entrepreneurship a reckless and risky business. Starting a business is a calculated risk that is weighed heavily in your favor with a proper plan. Your business plan is a brilliant document that sets in motion a strategy for success that incorporates your greatest strengths and outlines a counterpunch to mitigate every risk—it considers the best- and worst-case scenarios. Nothing guarantees success; however, a plan is the closest thing you can get to a guarantee. It is your best foot forward!
  • Once a business plan is written, you don’t have to worry about ever writing another one for your business again. The environment around you changes every day. Laws, technology, trends, etc. are constantly in motion. While you create a version of your plan for a moment in time, it should always be kept up to date. You should update your plan at least once a year. Your subsequent plans should consider how your company performed versus the plan, the internal change to your organization and changes in the environment outside your organization.

Conclusion

Starting a business is exciting and scary all at the same time! In the spiritual world, people utilize a guide to determine their every move—for Christians that is the Bible. Consider your business plan your organization’s bible. Don’t knock the analogy—your business plan also incorporates your guiding principles (your values) that you will perform under. The bottom line is that your business plan is ESSENTIAL to effectively minding your business.

Additional Information

SBA business plan course

Alpha Teach Yourself Business Plans in 24 hours

The Entrepreneur Magazine Small Business Advisor

About The Author

Jowanna Parris-Daley owns and operates jowanna inc™, a small business consulting company that offers services including business plan writing, e-consulting, website design and technology services for startup businesses.

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