Understanding the Benefits of a Written Business Plan
Creating a solid business plan takes time and energy. You may be asking: "Why do I need a business plan?" or "Why go to the trouble of documenting a business idea that I know will work?" The answer is that you significantly increase your chance of success if you chart your course with a written business plan.
A well-written business plan can provide two distinct benefits.
- First, it can serve as the vehicle to convince potential investors or lenders to provide the financial backing needed to start your business.
- Second, it can serve as an important management tool, providing a blueprint and step-by-step instructions for transforming your ideas into a profitable business, providing goods and/or services to the selected market.
Remember that no two business plans will look alike.
There are a number of key considerations that will play an important role in shaping the content. These considerations include whether you're writing the first plan for a new business or business opportunity, or writing a plan that updates or supersedes an already existing plan. Your business's current status will have a significant impact on the type of planning that's needed. An ongoing business might require a plan that relates primarily to a new market that it wants to enter, or a new product that it wants to introduce.
Our discussion of the value of a business plan addresses the issue from two angles: the benefits of a plan and the events that make it appropriate to create a plan.
Know the Benefits of a Written Business Plan
Everyone who opens his or her own business has a plan, however informal. The camera store clerk who decides to open a photography studio may not have a formal, written plan outlining the steps to be taken. Hopefully, however, at some level she has organized the relevant information, performed her own analysis of the market, and decided that she can make a living by starting out on her own. Perhaps she has been moonlighting by photographing weddings and other special occasions and the demand for her professional services seems sufficient to support her without the camera store job.
What steps did she take to reach that decision? Hopefully, at a minimum, she sat down and tried to compile a list of what it would mean to leave a salaried position and take on a free-lance career. At the top of the list would be a comparison of the net income from free-lancing to the net salary at the camera store. That would involve estimating the number of jobs she could reasonably expect, the cost to provide the required services, and the prices she could charge. The irregular timing of payments versus a steady income might present personal cash flow problems. The availability and cost of benefits would also rank high, as would all the intangible factors that differentiate self-employment from employee status.
However, even if our hypothetical camera store clerk has a well-thought out plan entirely in her head, at some point she will need to communicate it to others, such as suppliers, professional advisors, and perhaps a banker from whom she wants to obtain a line of credit.
Having a written plan is an essential communication tool, since it's not practical to explain your operations in person each time someone needs to know who you are. Moreover, the odds are that our budding entrepreneur has not thought out every significant aspect of her future business. Going through the process of creating a written plan can help ensure she hasn't missed any significant factors that can cause her fledgling business to fail.
When Should You Create a Written Business Plan
If you're just starting out in business, a written business plan can help you organize all the pieces that will have to come together to make your business a success. A business hoping to expand its operations in some way can achieve the same benefits. A well-established business trying to grow out of a business-as-usual rut can use a plan as a modeling tool to examine various options before committing to one.
Many small business owners feel that they can keep track of everything without the need to write it down. A written plan, after all, is really just the embodiment of the internal planning that every business owner does anyway. However, the structure of a written plan provides makes it more likely that you will consider all relevant factors and that nothing important slips through the cracks.
What justifies the additional time and energy you'll spend creating a written plan that presents a blueprint of your business idea? An increased chance for success. More specifically, a plan can be
- A reality check when you first examine the feasibility of your business idea, which forces you to consider all relevant factors.
- Your business's resume, which will be vital in dealing with lenders and outside investors, and an important tool in negotiating with vendors and attracting employees.
- A timetable for operations, helping you to coordinate all the diverse activities that go into running your own business.
- A modeling tool that helps you evaluate the variable factors that affect your business, so you can better prepare to deal with situations that may arise as conditions change.
- A vehicle for tracking the progress of your business.
- A blueprint against which you can adjust operations in order to achieve your goals.
- A starting point for future planning.
Written Plans Help Assess Feasibility of Your Business Idea
Going into business requires you to objectively evaluate whether your
idea for a business will yield the results you want. Common reasons why
people start new businesses are to change careers, work for themselves,
or do something that they enjoy. Regardless of the reasons, many small
businesses don't make it beyond the first few years.
How do you assess whether your idea can lead to a successful
business? How do you convince yourself (and others) that you can make
money exploiting the idea?
A written business plan is one way to
evaluate an idea before you commit to pursuing it. The process of
creating the plan can reveal factors that you might not otherwise
consider, which might save you from making a bad decision.
Many years ago, before there were a dozen gourmet coffee shops in
every town, most people bought coffee at the grocery store. There were a
few specialty stores that roasted and sold their own beans, and a
couple of mail order firms that sold rather expensive whole bean coffee.
Customers paid a tremendous premium in exchange for the freshness
that came from grinding the beans just before brewing the
coffee. Although people were willing to indulge themselves for a few
extra dollars a pound, the cost per cup wasn't that high.
An entrepreneur friend of ours saw an opportunity to bridge the gap
between the specialty shops, which purchased the beans green and roasted
them, and the supermarkets, which mostly carried canned coffee. He took
a chance, borrowed some money, and opened a coffee store. He found a
mail order source that would sell to him cheaply enough so that he could
effectively compete against the few local specialty shops that existed.
As time went on, he found a local roaster who didn't operate a
competing retail outlet, and he was able to reduce his cost while
maintaining or increasing the quality of the product.
Even though his sales volume slowly increased and his profit margin
rose as he reduced costs, it seemed like he could never make ends meet.
He restocked coffee only as his bins were depleted, added teas, spices,
and brewing equipment, but never really hit big, as he had hoped. Sales
growth slowly declined as more competitors arose. When the bigger chains
entered his Midwestern market, the game was over. He couldn't hope to
compete with Caribou Coffee or Starbucks. The business slowly ground to a
halt, superseded by the larger mass marketers.
What went wrong? It would be easy to say that he failed because of
the unanticipated entry of new competitors into the market. But that was
really just a symptom of his failure to plan. When he opened his first
store, he knew what coffee cost, he knew what his fixed expenses were,
and he set prices that let him cover expenses plus generate a small
But he didn't go any farther. He had no plan that tied
advertising to specific sales targets. When business was slow, his
creditors and suppliers were paid late. The big chains were already
swiftly expanding across the country, even though they hadn't reached
his market yet.
With some research and planning, this business owner would have
realized that it wouldn't be long until the big chains were a force in
his market. He also would have seen the nature of the market shift, with
customers expecting to purchase fresh-brewed coffee in addition to
whole beans. He had correctly identified a niche, but failed to follow
through with the planning that might have revealed the strengths and
weaknesses of his business.
In retrospect, this entrepreneur often bemoaned the fact that he
could have positioned the business in such a way that the big chains
would have bought him out. Perhaps he could have. Had he kept closer
tabs on trends in the industry he would have realized that the
competition wasn't just selling beans anymore. They were opening early
to offer commuters fresh morning coffee and bakery goods.
What is certain is that this business owner's decision to operate
without a formal business plan cost him dearly. The failure to
anticipate new entrants into the market, the failure to consider what
kind of sales volume levels were required to grow the business, and the
failure to establish realistic measures by which to judge his success
were fatal to the business. He operated his business reactively by
adjusting as best he could to the changing market instead of operating
offensively by planning for those changes in advance.
Moral of the story: if this business owner had taken the time to
create a formal business plan, he would have had the opportunity to more
closely examine some of the assumptions he made when he first started.
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