What is it about a business plan that makes it such an essential ingredient for success? Let’s take a closer look!
Why a Business Plan Is So Important
We’ve all read the stories of million-dollar businesses that started with a few ideas jotted on a scrap of paper or a bar napkin. But in reality, how many of those businesses grew to million-dollar sales without developing a business plan at some point? A business plan helps you answer important questions such as what is the best business model, what is the future path of the business, and how is the business going to reach its goals? Beyond that, formally-developed business plans serve a number of purposes.
Helps You Articulate Your Vision
A business plan gives you a means for capturing your entrepreneurial vision in writing. It enables you to fine-tune your aspirations and recognize where there are gaps or inconsistencies in what you want to accomplish. It also helps you spell out your business’s purpose and describe the products and services you’ll offer in detail. Rather than keep that info in your head, a business plan frees up your mind to concentrate on what you must do to fulfill your vision.
Helps You Understand Your Industry, Market, and Competition
As you work through the process of writing a business plan, you’ll have an opportunity to gain valuable knowledge about your business strengths, weaknesses, opportunities, and threats. You’ll learn a lot through conducting industry, market, and competitive research. Many entrepreneurs make assumptions about these things, and research is the only way to validate preconceived notions. A business plan helps you better understand your competition, the market you’re entering, and customer trends and preferences. It also helps you recognize possible roadblocks (which could come in many forms, such as the regulatory environment, technology, and other forces within or beyond your control).
Helps Access the Viability of Your Business Idea
According to data provided by the U.S. Bureau of Labor Statistics, only about half of private-sector businesses started in 2014 survived into 2019. Surely, the entrepreneurs who started those now-defunct businesses didn’t set out with the goal of failure. It’s more likely that they neglected to do the work involved to assess the feasibility of their business ideas and create a plan to guide them through the startup process and beyond. A business plan will help you identify red flags in advance. It’s an excellent way to do a “reality check” and recognize warning signs of impending doom. With a realistic view of whether your business idea has a chance of success, you can make an informed decision about whether to move forward, cease and desist, or alter your course.
Provides a Road Map for Launching Your Business
A business plan is also important because it provides direction as you work through the many tasks involved in starting a business. Writing a business plan helps ensure you’ve thought through all of the considerations and requirements. It forces you to think through important decisions in advance and set goals and objectives for which you want to aim. Moreover, a business plan will help keep you on track with all of the tasks required to start your business and operate it legally. For example, registering your business entity type, applying for the licenses and permits you’ll need to obtain, and other mission-critical details.
Helps Address Unseen Flaws
By capturing your vision in a business plan, you’ll be equipped to share it and get feedback. Seek the honest, unbiased thoughts and advice of trusted professionals, friends, family members, and colleagues who will be willing to give you their honest, unbiased thoughts. Doing so can help you identify problem areas that you couldn’t see on your own. From there, you can fine-tune your plan.
Helps Identify the Talent Needed for Moving Your Vision Forward
Starting a business is time-consuming and there may be tasks that will require specialized expertise or skills that you personally do not possess. Understanding legal matters, creating financial reports and forecasts, developing a website, and managing payroll are just a few of the responsibilities that you may not be able to handle on your own. A business plan will help you identify resource needs so that you can begin to look for employees, advisors, contractors, or companies with the knowledge and talent you require.
It Can Equip You to Find the Right Suppliers
A business plan will help you identify what materials you’ll need to offer your products and services. In turn, it will shed light on the criteria you must look for in potential suppliers. For example, if an entrepreneur plans to manufacture all-vegan, organic spa products, the business plan will help dictate the standards the company will look for in its vendors.
Helps You Set Priorities
By seeing all the moving parts involved in starting your business in one place, you can decide what needs your attention first and what can wait. A business plan will help you keep track of what you must do and determine how to allocate your time, energy, and resources wisely.
Helps Set Realistic Goals and Objectives
A business plan will help make you more intentional about setting goals and objectives for your company. Moreover, having goals in writing facilitates a higher level of accountability for your long-term vision. It provides an incentive to look at your business’s potential realistically and to question assumptions. By using your business plan as a guide, you will be reminded to focus attention on both the operational and financial objectives of your startup.
Helps Attract Investors and Obtain Financing
Lenders like banks and credit unions and other institutions will want to see a business plan. Investors will want to see a business plan so they can assess if the business idea will be a sound investment. A business plan is essential for securing funding (such as from bank loans or equity financing) or attracting investors (like venture capitalists or angel investors). Sure, a dazzling presentation akin to what you see on Shark Tank may pique investor interest. However, you’ll want to provide a well-written document that potential investors can review to evaluate the opportunities and risks of financing your business idea.
Helps Cultivate Sound Decisions
Having a business plan allows you to make better decisions because it helps prevent decision-making on the fly. It gives you strategic direction, so fewer outcomes are left to chance. Not only is a business plan important for startups, but it’s also a valuable tool for established businesses. All businesses change and grow. All industries evolve. Therefore, a business plan should be approached as a living, breathing document that needs to adapt to the circumstances at hand and its environment. Entrepreneurs should review and update their business plans regularly. This is especially critical when they see shifts in their market, competition, industry, company growth, financial status, and other critical areas. By keeping your business plan current, you’ll be better equipped to navigate change and make adjustments to stay on the path to success.
Serve as a Communication Tool
You can use your business plan to communicate your vision and business projections with key stakeholders. Potential lenders, investors, project partners, suppliers, key employees, major clients, etc. may rely on the details in your business plan to assess whether working with you will be a sound decision for them.
The Risks of Not Having a Business Plan
Several potential risks that entrepreneurs might face if they neglect to write a business plan for their startup include:
- Running out of money because they haven’t identified all of the startup costs involved in launching the business.
- Unable to sustain running the business down the road because they failed to identify all ongoing costs involved in operating the business.
- Selling products and services that aren’t profitable because they didn’t identify all the time and labor involved in providing them.
- Not attracting customers because there is no market need for the company’s products and services.
- Not attracting customers because competitors’ products and services are superior.
- Facing fines, penalties, and even suspension or administrative dissolution of their company because they didn’t identify their business compliance responsibilities.
All bad stuff, right? I could go on and on about possible downsides. But I believe those examples amply demonstrate why it is important to have a business plan!
Critical Questions to Consider
Like any new endeavor, developing a business plan might seem like an overwhelming task. Challenges include choosing the right verbiage, knowing what to include and what to leave out, where to find statistics and marketing information to back up your ideas and add credibility to your plan, and more.
Don’t let the details prevent you from moving forward. As with any big task, writing a business plan is less daunting if you break it down into smaller sections that are easier to execute.
Before you jump into actually writing your business plan, take a minute to answer the following questions to get your head in the right frame of mind:
- What products or services will you be selling?
- Who is your target market?
- Is your target market broken down into personas or subgroups?
- What pain points, challenges, and struggles do your future customers struggle with?
- How will your product or service help your customer solve problems?
- Who is your competition?
- How does your offering compare to what your competitors offer?
- How much will you charge for your products or service offering?
- What costs will go into the development or execution of your products or services?
- What software will you require to run your operations?
- What type of building or office space will be required for manufacturing, operations, logistics, or sales?
- What resources and staff will you need?
- What type of supplier or manufacturing relationships will be needed to secure your supply chain?
- Are there any possible spinoffs or ancillary products and services?
- How will you market your offering to prospective customers?
- What is your measure of business success (for example, number of customers or annual net income)?
- What are the obstacles to your success?
- What are your solutions to these obstacles?
Core Elements of a Startup Business Plan
These days, successful startups create business plans that come in a variety of shapes and sizes. Some take up no more than a few pages and can be explained in no more than a few minutes, while others are much longer presentations with clearly defined data points. Founders and their most trusted team members start with a predominant vision and develop goals and strategies aimed at seeing that vision come to light.
Whether they develop their own methodology or use one more methodology created and published by experienced consultants and agencies, successful startups take the time to create a plan that keeps them on track but allows them the freedom to pivot when they need to. From a guiding vision to regular checkpoints, and an expectation of accountability, these plans are the new business roadmap.
The sections of a business plan may vary for different businesses. Many business plans include the following segments.
The Executive Summary (Company Description)
Here’s your chance to make a good first impression—especially since many readers won’t read past this initial section. Concisely describe what your company does in the first paragraph of your Executive Summary. Be succinct, descriptive, and engaging, and explain the specifics of your business. Why did you choose your business name? Why did you choose your business structure? Why is your business uniquely qualified to succeed? Is it your intellectual property, your management team’s unique and/or extensive background, your startup’s early (standout) accomplishments, your key partnerships, or favorable market trends?
In this section, you should also summarize your vision and your goals. In the beginning stages of a startup, entrepreneurs tend to improvise, and their vision may be a bit hazy. Developing a business plan helps sharpen that vision, and down the road helps the startup succeed. But keep in mind, where businesses of the past started with “what” they were going to produce, market, and sell to “whom”, modern-day businesses start with “why”. Their visions tell a story of a better world for a specific group of people. These visions are backed by core values that define what is important to the founders, the types of employees they want on their team, and the way that their organization will interact internally and with the outside world.
Products or Services
In this section, go into more detail about your service or product. Thoroughly describe your product or service and any associated intellectual property information such as patents or trademarks. Describe what makes your product or service unique and competitive in the marketplace. Most likely your business has more than one product or service, so be sure to provide a brief description of each. Use colorful photos or drawings to illustrate your business and include relevant details such as dimensions, weights, and shelf life. For service businesses, outline your menu of services and any add-ons or extras customers can purchase.
Do you have plans to add new products or services as your business grows? If so, outline the areas of opportunity you see. Explain what you plan to add to your offerings and how that will make your business more competitive.
Market or Situational Analysis
In this section, you need to provide detailed statistics and research on your target market. In a traditional business plan, this was called “SWOT Analysis”, in which companies outlined an exhaustive list of Strengths, Weaknesses, Opportunities, and Threats. In today’s market, this is can be a more fluid conversation.
Colorful visuals are important here to help highlight the key numbers and demographics supporting the validity of your business idea. Use your market research to explain why your business is different and how it will appeal to your prospective customers. Show the reader that you know your market and you understand where your best prospects lie.
Are there new markets you’ll explore in the future, new product lines you plan to add, or new services you expect to develop as the business grows? Include them here. You should also include information about your sales and marketing strategies, such as digital, print, word-of-mouth, etc.
Where to get all those facts and figures?
- The American Factfinder section of the Census Bureau website has helpful marketing research and consumer data for free. You can search for market information by specific address, by city and state, and find specific city demographics such as social, economic and housing characteristics. You can also look for business patterns statistics and key populations by county.
- eMarketer.com is a great source for information on online marketing trends.
- If you’re not finding the market research you want or you need help gathering the research, check out Ask Your Target Market. AYTM gives you the tools to conduct your own market surveys. Or, if you don’t feel you’re qualified to put the survey together, AYTM will create the survey for you.
Company Goals and Objectives
While many plans still include a 3-5 year estimate on sales, market share, and/or valuation, most goals are set in 60-120 day intervals. Personally, I prefer to use quarterly (90 day) cycles and roll that up for the purposes of a startup business plan. That allows you to significantly move the needle four times a year and accounts for typical swings in business based on the quarter. For example, retail businesses are completely different in Q4 during the holidays than they are in Q1.
The shorter time period allows you to focus everyone’s attention on a limited number of goals and resulting projects. I’d recommend no more than four major items in a quarter. If you’re launching a new business, the four goals for your first quarter might be something like:
- File incorporation documents
- Set up bank accounts
- Launch website
- Sign on the first client
Whether it’s just you, you and partner, or a whole team – if it’s not on this list (and not part of regular business operations), it doesn’t get touched. This will allow you to stick to your startup plan and get it moving quickly.
Operational Plan & Team Members
The organization and management section of the business plan tells your readers about the organizational structure of your business and which key employees or owners are responsible for key areas of the business, such as operations, sales, finances, etc. Make sure your business plan explains how each key employee adds to the success potential of your business by explaining their expertise, special skills, and prior experience.
If you’re a sole proprietor, you most likely outsource some of your work or special projects to independent contractors or freelancers. In that case, including information on their expertise, as well as that of any business consultants you regularly engage with or have on your board of advisors.
Finally, since readers want to see your potential for growth, you should also project how your org chart will develop as the business grows and what positions you plan to add in the future.
Financial Projections
This section outlines what your business will accomplish financially over the next three to five years. The Panel Study of Entrepreneurial Dynamics II found that business plans are vital for external fundraising because a plan builds legitimacy and confidence among investors that the entrepreneur is serious. It also serves to reassure staff, suppliers, customers, and other key stakeholders.
Potential investors, creditors, and business partners want to know whether they’re making a good investment in your business. Having solid projections and supportable figures in this section of the plan is key. If you are developing a business plan to seek immediate funding, you also need to include a formal funding request. This should specify how much you need, both now and in the future, and what the money will be used for. Go over this section with your accountant to make sure everything is worded correctly and that your numbers make sense.
Appendix
Supporting data and documentation that provides additional detail about what is in the other sections of the business plan.
Popular Planning Methodologies You Can Use
Planning strategies are fairly customized now. There’s not a one-size-fits-all document like the old business plan. You really are free to create a strategy that works for your organization. But, if you’d like some framework to guide you through the process, here are some popular methodologies that many startups have used to create and help execute their business plan.
- Gazelles (Scaling Up) – This well-documented program walks you through the creation of a “One Page Strategic Plan”. It covers everything from setting goals to reviewing progress and making decisions on what to do next. It serves as a blueprint for building an effective strategy. While I always modify it to fit a particular business, this is the structure I use when developing strategies for my companies, and for my clients.
- Entrepreneurial Operating System (Traction) – There are several similarities between EOS and the Gazelles’ Scaling Up program. Traction spends more time on meeting rhythms, feedback loops, process documentation, and organizing documents and workflow. Many startups tend to use EOS in conjunction with Scaling Up to flesh out the operational strategy that supports the larger and creative goals.
- The Lean Startup – For those of you that are less interested in a structured program for developing a strategic plan, and simply want to learn more about how companies are creating flexible, scalable businesses, I suggest researching and following The Lean Startup movement. Here, Eric Ries uses stories and examples to describe how executive teams can apply lean manufacturing principles to business management.
Remember to Revisit and Review Your Plan
Last but not least, your planning strategy should include a system for documenting processes and reviewing them on a regular basis. While this may sound like a tedious task that doesn’t belong in a fast-paced business, hear me out.
Documenting processes and reviewing them regularly has huge benefits:
- As you scale you’ll need to delegate tasks, projects, and accountability to more team members. If processes are documented, and not just in your head, or in your managers’ heads, they are easier to transfer to new staff.
- Reviewing processes helps founders and managers stay in the loop on how work is getting done.
- Reviewing and comparing processes allows you and your team to spot redundancies, and identify areas where processes should be combined, or split in different ways to achieve a more productive workflow.
- Reviewing processes allows you and your team to look for opportunities to automate manual processes. This often leads to cost-savings and frees up one of your team members’ time for more creative thinking.
If you skip this part of your planning strategy, you risk creating and fostering systems that are duplicated, redundant, outdated, and unnecessary because everyone continues doing what they’ve always done… because that’s the way they’ve always been done. That’s no way to grow a profitable, long-term business.
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