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Evaluating the Need for a Business Plan

Filed under Business Planning. Fact checked on May 24, 2012.

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Starting a new business is an obvious triggering event for creating a business plan. But changes in the business, or business environment, may also make it advisable to create a plan or to revise an existing plan.

Although starting a new business clearly calls for a written business plan, there are many other reasons to create one. Many factors affect an already operating business and your plans for for your business can change over time.

If you're just starting out in business, the time it takes to create the first plan will be more than repaid by the insight you gain. If you're in business already but have never created a business plan, you'll be in a much better position to assess opportunities and risks that accompany the various changes you may be considering making. In any event, the time and effort expended serves to increase your likelihood of success.

You should create a business plan if you're considering any of the following events:

  • Opening a new business.
  • Expanding your current business.
  • Introducing a new product.
  • Entering a new market.
  • Creating a new distribution channel.
  • Acquiring a new business or franchise.

Using a Written Business Plan to Open a New Business

Starting a business is a big step. You have to have a good idea, flesh out all the details needed to put it into operation, and be firmly convinced of your ability to make it work. Having it all worked out in your head is one thing, but for most entrepreneurs, it's only when you take the time to create a written document that embodies your thoughts that you realize the scope and magnitude of what's involved in running a business. In your head, you've concentrated on the idea. In your plan, you can examine the nuts and bolts of running a business to exploit your idea.

Every business has one thing in common--the owner believes that their product or service is unique to a particular marketplace. No entrepreneur wants to provide a product or service that is indistinguishable from others like it. But there is more to a business than offering a unique product or service. There are also all the unspectacular parts of the business, from keeping the books, to paying bills and taxes.

With very limited exceptions, most businesses have a lot going on in the background behind the primary business activity. There are numerous service businesses designed to handle things like health care plans, payroll taxes, billing, and many other tasks that almost every small business owner would otherwise have to do.

Assuming that you've considered the personal impact of starting a business and you're certain you want to proceed, remember one thing--if you work hard to create a business plan and your plan demonstrates that you can't profitably exploit your idea without making some pretty wild assumptions, you haven't lost anything. Instead, you've saved yourself the time, money, and heartache you would have expended on a hopeless cause. It is far better to realistically appraise your chance for success before you commit your time and money to a new enterprise. Not every good idea is immediately, if ever, feasible.

Since you're considering a wholly new business, a big part of the planning process is going to involve developing an initial set of assumptions. You'll have to make assumptions regarding costs, labor, the number of potential customers, pricing, and many other factors. 

You'll learn a lot about your prospective business going through this process. When you do move ahead and implement the plan, you'll be far better equipped than you would have been if you had just jumped in with both feet. Not only will you have a written plan for guidance, you will have started to hone your own planning abilities, providing you with a better chance than your less-prepared peers.

Using a Written Business Plan to Expand Your Current Business

Opportunities should never be ignored: A business plan is the appropriate vehicle for assessing whether they should be pursued. For example, a business that creates and sells products might be able to acquire additional or better production equipment because the volume of business has reached a level that justifies the expense. Or, it might be time for a retail establishment to consider the costs, benefits, and risks of expanding its facilities or opening a second business location.

Planning for growth can also reveal some of the disadvantages of getting bigger. For example, there are a variety of regulatory requirements that kick in as your workforce grows. Careful planning can help manage the costs associated with complying with these rules. As the number of employees approaches the threshold for application of additional rules, you'll be able to choose between increasing the permanent workforce and alternative methods of getting the job done.

Using a Written Business Plan to Introduce a New Product

An existing business serving an existing market can expand through the development of new products or services. For example, some payroll service companies are now actively marketing retirement plans to their customers. 

Launching a new product is definitely a time when you'll want to create or revise a business plan. The scope of the plan may be limited to just the new product, provided that you've already planned for the time and resources that the project will require. If not, you'll have to revisit your existing business plan and integrate the new product project into the overall plan.

In general, a new product introduction will have a substantial effect on your business. Consequently, any of the following events would justify creating or amending your business plan:

  • Providing a wholly new product or service that differs from anything that was available at the time of its introduction (consider the first pocket calculator and fast oil change services).
  • Enhancing or modifying an existing product or service.
  • Repackaging existing products.

Using a Written Business Plan to Enter a New Market

An existing business can expand by entering new markets in a variety of ways. Such an expansion absolutely triggers the need for some serious business planning. In order to reach most new markets, you will have to face many of the same issues that you addressed when you first went into business. You'll also have to deal with dividing your time between your current market and your new market. 

There are three common ways to enter a new market:

  • Expanding your operations to include a new geographic market.
  • Reaching out to new customers in your existing geographic market.
  • Employing a new distribution channel to reach another market segment.

Although the phrase "new geographic market" might make you think of a large local chain expanding across the country, many small businesses also locate in multiple markets. You just need a sense of what constitutes a new market. 

Example

The owner of a coffee shop located next to a commuter train station can expand into a new geographic market just by opening a shop at another stop along the line. Due to the nature of the business, a whole new crop of commuters and local residents constitutes a new geographic market. It doesn't matter that the new shop is just minutes away.

The decision to enter a new geographic market clearly calls for the creation of a written business plan. Even though many factors will remain the same, at least at first, you can't simply clone your business operation and be assured of success. You'll have to research the demographics of the new location to be assured that the target market is big enough to support your operations.

In the case of our coffee shop owner, the fact that every train doesn't stop at the same station might make an otherwise suitable location unacceptable. You may be considering hiring employees as a result of your expansion, and that too requires careful planning.

In effect, entering a new market is basically equivalent to starting a whole new business. If you thought it was worthwhile to create a written business plan when you first started your business, the case for creating a business plan before entering a new market is equally compelling. If you didn't create a business plan when you started your business, now is a good opportunity to see what can be gained by doing so.

Using A Written Business Plan to Create a New Distribution Channel

Existing businesses can often expand by offering their products and services through a new distribution channel. Many businesses that once sold goods strictly by mail order have now opened retail outlets in fancy malls. For example, certain brands of franchised fast food can now be bought, pre-cooked, in grocery store freezers. The decision to exploit a new distribution channel presents risks and opportunities that must be carefully weighed in advance. A business plan gives you the vehicle for that analysis.

A few years back, one of the first fast food chains considered making its hamburgers available in the frozen food section of grocery stores. Previously, the chain had marketed its products exclusively through its retail outlets. A business plan provided the framework for assessing whether this new sales channel was worth considering.

  • The marketing sections of the plan explored issues such as who (and how large) this new customer base was, how to package and price the hamburgers, and what the impact would likely be on the chain's existing restaurants.
  • The financial sections of the plan analyzed the potential for profitably exploiting this additional sales channel. It contained estimates relating to number of units sold, expenses of production and distribution, and how long it would be before the costs were recovered through sales revenues.
  • The action sections of the plan provided a mechanism for organizing and evaluating the myriad operational issues that the expansion created. It answered questions such as: who cooks the burgers that are frozen and sold at the grocery store? How do they get to the stores? What impact will the higher volume of business have on costs, staffing, relationships with suppliers, etc.?

Using a Written Business Plan to Consider Acquisitions and Franchise Opportunities

If you're considering acquiring an existing business, how do you know how much to pay? Will the business provide you with the income you need three years down the road? A business plan is the perfect tool to use when you assess whether you should buy a business.

In fact, many sellers will create a selling memorandum, which is really a business plan in reverse, to fully acquaint you with their business and convince you that the opportunity is a good one. You can use this as a starting point for creating your own plan for the future.

Deciding whether to purchase a franchise is a serious issue. By becoming a franchisee, you agree to conform to a wide variety of requirements the nature and extent of which will depend on the particular franchise you acquire. A business plan provides the framework for considering whether the benefits of holding a franchise outweigh the associated costs and restrictions. The plan is the perfect tool for modeling how your business will perform as a member of the franchise. If you're already operating as an unaffiliated business, you can compare your current operations to the costs and opportunities presented by joining the franchisor.

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