Spontaneity is fun. But in the profit-driven world of big business, careful planning just makes more sense. The Small Business Administration says that 70% of start-ups are likely to fail in their first two years, and the reasons are too many to mention. One of the biggest failure factors is a poorly constructed business plan – or no plan at all.
While these documents are essential to the success of a business, many entrepreneurs wonder what constitutes a good business plan.
At the heart of a business plan
So much has been said about business plans, but they still remain largely misunderstood, often with dire consequences. So if you’re just getting started, setting clear goals is always the clearest path to a solid plan.
Perhaps the most important goal of a business plan is to focus on your business. Note product information, labor requirements, financial projections, and other details that characterize and define management.
The Small Business Administration advises that you periodically check your business plan and update it whenever you make any changes. This can highlight how the adjustments can affect your business as a whole. Overall, the plan should remind you of your original goals for starting the business, any new goals you set along the way, and how these two influence your initial vision.
Test strategies and evaluate performance
To get an accurate picture of the strategy, you can compare actual and planned results and learn lessons that help you make safer trading decisions for the future. If some parts of the policy failed, you can remove or modify them to work better.
If a new product is currently underperforming, management may decide to improve or repackage it. With a business plan, different theories can be tested, from finance and marketing to customer relationship. Without a record of a business plan, leaders can make decisions based on speculation and assumptions, which increases their chances of failure.
Appropriate allocation of resources
One of the most important goals of a business plan is to build consensus on everything about the business – vision and mission, goals, projections, strategies, processes, target markets, etc. Unless everyone is on the same page, the right allocation of resources becomes difficult, thus hampering growth.
With a clear business plan, decision makers can work in harmony without having to consult or verify each other, saving everyone time while working towards common goals.
A very practical goal of a business plan is to prepare a fundraising case. It’s no secret that banks and other lenders ask for this essential document as part of their due diligence before granting loans.
With a plan in place, banks are able to explore the goals, ideals, and methods of operating a business. All of these provide clues to the comparative financial value of the business. Needless to say, business plans form the bulk of the basis upon which loan providers decide whether to approve or deny an application.
Provide motivation for growth
Starting a business can be intimidating, especially for new entrepreneurs. By breaking it down into something concrete, aspiring business owners can have a clearer and more reliable view of how they can materialize their goals.
The tangibility and objective nature of a business plan can help you increase your confidence and motivation in growing your business. Yes, you can still discuss your plans verbally in meetings or conversations, but a black and white approach provides a better understanding of where you want to go and how to get there.
Another goal of a business plan is to attract potential investors. Before people invest their money in a business, they will naturally want to review performance plans, and a business plan couldn’t be more perfect for that. The document will provide a crystal-clear picture of the company’s current financial performance, expected profit streams, marketing research for the target population, plans for growth and expansion, etc.
In other words, a business plan gives potential investors a big picture of what they can expect from a certain business. It’s a good way for you to showcase your business and engage these investors.
Support for new executives
As a business grows, you’ll likely add executives to your team to help get your business on the right track. A business plan gives these new decision makers a broader scope of the business and how their skills can play an important role.
Lack of a business plan can also lead to false expectations, disappointments and frustrations, which can ultimately undermine the interests of both parties.
Planning for success
Just looking at a clear outline of a business plan with goals will make it easier for you to see how it plays a central role in success. But, in addition to creating this plan, you also need to keep it from being static, letting it evolve with the dynamic needs and demands of the industry. A good rule of thumb is to update this document every year.
A business plan is a good way to go back in time and assess the business for what it has accomplished so far, which requires more work and attention and, most importantly, how existing processes can be improved to produce competitive results.