Starting a business is a great experience. There’s coming up with the business idea, executing the plan, and the euphoria from watching your project come to life. But there’s also a lot of hard work going on behind the scenes related to funding, market research, personnel planning, and a whole host of other concerns.
Potential investors, partners and even clients may want to see documented evidence of your decision regarding these issues, before putting money into your business; and a business plan provides that documented evidence.
But what if you’re funding your own business? Or already have all the partners you’re taking on? What if you don’t even need any additional clients at the moment? Would a business plan still be worth the time and effort to hash out? The answer is a resounding yes – here’s why.
1. Challenges the Plausibility of your Business Idea
Ever notice how often something sounds great in your head, until you finally start to write it out on paper? Then suddenly, it doesn’t make a lick of sense and you’re left wondering why you ever thought this was a good idea in the first place.
Business plans help many entrepreneurs come to this realization before suffering the embarrassment and bankruptcy. A more objective way business plans test the feasibility of a business idea is through market research. Before writing a business plan, businesses are encouraged to do research covering:
- Whether or not the market or industry can sustain another business
- If the industry is growing
- The likelihood of attracting customers in particular locations
2. Encourages Research on the Competition
Business plans also force entrepreneurs to do some snooping around their competitors’ yards – legally, of course. This information usually comes to the surface during a SWOT analysis, as entrepreneurs begin to identify their strengths and weaknesses, as well as opportunities and threats in the market.
Competitors are always the biggest threats, followed by legislation and changes in the industry. Industry changes and legislation happen every once in a while, but competitors are always present. Business plans also help entrepreneurs identify barriers to entry competitors may have erected.
3. Helps You Differentiate and Position your Brand
Once you learn all you can about your competitors, you now have all the information you need to better position, differentiate and market your brand.
Take a closer look at all the complaints customers make about their products and services, and provide the solution. Is there a certain niche in the market competitors have ignored? Claim it as your own.
By looking at everything from their logo, to the customer service reputation, and personnel plans, you can use the information to stay a few steps ahead of the competition. And the good news is, you often don’t need to look much further than their website and social media to find the information you need.
4. Identifies your Customers
While consulting with clients, a common problem we notice is that most brands have no idea who their target market is, and how to reach them. A business plan compels entrepreneurs to confront this problem through market research and data analysis.
By knowing exactly who your customers are, you stand a better chance of connecting with them. For instance, it’s not enough to know you want to reach college students, because you happen to own a coffee shop near a big campus. What kind of students do you want to reach?
Our best bet would be millennials with a steady disposable income, and who spend a lot of time on their laptops, with the occasional need for a caffeine-boosted late night. This might include liberal arts and technology majors.
Now you have the information you need to make decisions about WiFi, what TV channels to display and at what volume, the interior design, demographic of workers, and opening hours. Make no mistake, all of this is the part of branding and PR you handle in-house at your location.
5. Clearly Defines Roles & Positions
No matter how well-established a company is, one of the main problems employees encounter is drawing the line between their different roles and positions. This is a big problem at the floor level, but even worse when it comes to management.
Business plans help entrepreneurs keep the peace by outlining the specific functions of each role and position. Should any discrepancies arise in the future, there’s no need to say, “I think we originally decided that…” when there’s a document clearly illustrating what that original decision was.
Because of this, any personnel planning and job descriptions should be in line with whatever is set forth in the business plan.
6. Creates a Clear Hierarchy
Along with roles and functions, problems also arise with the hierarchy in companies. Managers and employees often get hung up on who outranks who, especially in new companies, where positions are often subject to change as the company and the industry changes.
Thus, a clear hierarchy is useful when there are grievances to settle, and may help prevent those grievances from arising in the first place. Employees must know exactly who to report problems to, and for what reason. It’s important for people to know who their bosses are; and for managers to know their scope of responsibility.
7. Contributes to Website Copy
Website-building can often represent a big part of business expenses. Even after the website is built, there’s still the task of adding website copy to detail your products and services, history, mission, vision, and even your key personnel.
Waiting until it’s time to add this info to a website to figure out what that should be is a bad idea – a terrible idea, in fact. This tacks on more hours to the process, and ultimately costs more money.
But if you provide even the bare minimum information of a business plan to copywriters and editors for your site, this simplifies the process for them, and reduces cost for you.
8. Forces you to Budget
One of the toughest parts of the business plan is financial planning. This includes a general overview of the capital you need, followed by details on how you plan to spend it.
Investors may also require details of how much profit the business can expect to make. This information is usually outlined in cash flow statements, balance sheets, and income statements.
These three documents force entrepreneurs to outline everything related to the dollars and cents in a business, and to plan accordingly. By doing so, entrepreneurs reduce the likelihood of under-funding certain areas, while wasting money on others.
This also helps to provide a realistic view of when profits will start rolling in, and how much. And finally, it helps to reduce the likelihood of a failed business, and resulting bankruptcy.
9. Establishes Milestones
As we mentioned before, investors often need to know not just how much profit a company can make, but when. This of course changes as a company gains experience and becomes a more recognizable name in their industry.
Investors care about this kind of information because it shows them how quickly you’ll be able to pay back loans, or offer a return on investment.
Businesses should care about this information, because with more profit comes the opportunity for greater reinvestment in the company for expansion and growth. This could mean taking on a PR firm, hiring a marketing team, running bigger ads, or funding for more research.
10. Prepares for the Future
By establishing milestones, companies are better able to determine what the future will look like, and therefore plan for that future.
How much money will you need to fund new projects? What about branching into Mexico? Or moving headquarters to London? How many more workers would you need to hire in each location to keep up with client and customer demands? But even more important – what if none of this pans out?
What if the business fails? According to Forbes, a whopping 80% of businesses don’t make it. If one of those businesses happen to be yours, what is your exit strategy? What is your plan to pay workers that last check, to liquidate assets, and pay off debts? Investors need this information as a Plan B when they put money in your business.
There are many concerns business plans broach that many entrepreneurs never consider until it’s too late. In fact, though 8 out of 10 businesses will fail, most businesses spend all their time planning for success and not enough planning on how to survive failure.
Keep in mind that many successful businesses did not start off that way. They are the phoenixes who rose from the ashes of ruined ventures. Not everyone gets that opportunity, so plan ahead. Always.
If you’re interested in getting help hashing out your business plan, or for any other business consulting services, check out our Business Consulting page to see how we can work together for our mutual success.