But it is arguably one of the most important activities that entrepreneurs can undertake.
Your business plan is a handful of sheets of paper in a three-ring binder that took hours to produce.
But it’s more than that.
A business plan isn’t just a roadmap for you as an entrepreneur. It is a highly versatile tool.
Business plans are testing tools and learning tools. They can be used to enhance communications and build the foundations of strategies. And of course, they form the launchpad for your next business venture.
If you already have a business plan, you know how useful it is. But have you been getting the most out of it? Read on.
If you don’t yet have a business plan for your next business concept or venture, or aren’t even considering one, you too should read on.
Use your plan to test.
Business plans are, among other things, testing tools. Use your plan as a testing tool in the following ways.
1. A business plan is the perfect feasibility test.
The world is full of ideas.
We know not all of them are good. But some of them sound good. And some of them really are good, but they cannot turn a profit.
No matter what the case is, understanding when to hold ’em and when to fold ’em, so to speak, can save you tons of headache, heartache, and money down the road.
While it may be disappointing to find out that your pet project doesn’t have a future as a viable business, knowing when not to pull the trigger is perhaps even more important than knowing a good deal when you see one.
The bottom line?
As an entrepreneur you will be devoting countless hours and dollars, not to mention a mountain of effort, to your business. If all it takes is writing a business plan to understand whether or not that commitment is worth it, take the time to do the due diligence.
2. A business plan is a good way to evaluate a new venture.
As an entrepreneur, writing a business plan is a good way to solidify your concept and crystallize your understanding of the finer points of the concept.
A feasibility test tells you whether or not your concept can turn a profit in a sustainable way. Evaluating a venture, on the other hand, helps you understand the best way to reach the hallowed halls of profitability.
How will your business reach your target customers? Is it better to focus on traditional marketing channels like print and radio or should your focus be on social channels and digital marketing? Where does your perfect customer spend his or her time?
These questions are best answered before a new venture is underway.
On the other side of the table, a business plan can be used to evaluate a new venture in the capacity of partnerships, strategic alliances, and contracting.
Let’s say you have started your business, and you are two years into operation. A new supplier approaches you and pitches an exclusive supply contract at a very favorable rate. You say, “I love it, but how can you offer these rates?”
It turns out that this supplier is brand new. How do you know that a contract with them won’t end in disruption of your business six months down the road because of insolvency on their part?
Well, you don’t know. But taking a look at their business plan can help you evaluate their business and their strategic outlook. The best decision, after all, is an informed one.
Learn from your plan.
Business plans can be learning tools if they are kept up-to-date and are consulted regularly.
3. A business plan can be used to identify issues before they become problems.
Forecasting may be imperfect, but it’s still a great tool.
Predictive algorithms are better, but nothing matches intuition. A business plan is, among other things, a roadmap for your business. And just like a real roadmap, if the conditions on the ground change, so too should the map.
That’s just course correcting, though.
If your plan hinges on a particular condition, and the pace of the business is not on track to meet that condition, you will have a problem on your hands.
Let’s say that an agreement with an investor stipulates that your business must reach a certain revenue threshold within a certain period, otherwise control of operations reverts to said investor. You don’t need an MBA to understand that slumping sales and a trickle of revenue won’t hit targets.
Having a comprehensive business plan that outlines conditions like these, along with the ways in which your business will accomplish these goals, provides you with a reference document and, more importantly, a roadmap.
How do most travelers get lost?
They lose track of where they are on the map.
4. A business plan can be used to identify opportunities.
In much the same way that a business plan is an important way to identify potential issues and problems, it can also be used as a tool to uncover new opportunities.
Business plans are living documents. And while your business plan may not be as well-known as a famous living document like the US Constitution, it is just as important to your business as a source of guidance.
As the environment in which you do business changes (and it will), taking a critical look at the direction you are headed based on the path you have laid out in your business plan is a healthy business function.
Keeping an eye out for bottlenecks, pitfalls, and inefficiencies is crucial.
Part of running a successful business is getting better every day and in every way. An easy way to spot opportunities for growth is to monitor what you know to be true about your business and the direction in which it is heading, and then to compare that to what you have in your business plan.
No matter how good, how comprehensive, or how predictive your business plan is, you do not have a crystal ball.
The key is looking at the difference between the way you thought things would be and the way they really are, then crushing the areas you can improve.
5. A business plan can be a learning tool when it comes to defining a business’s value.
In the event of a valuation, a business plan can be used to help all parties involved understand the direction the business is heading in.
Valuations can happen for a number of reasons.
Say a partner passes away, a spouse who is also a stakeholder in the business becomes divorced, or a business is targeted as an asset by creditors.
Those situations don’t sound particularly pleasant, but they can be an unfortunate reality for some business owners. Life happens. Instead of running from situations such as these, be prepared and use the resources at your disposal.
Use your business plan as a strategy asset.
6. A business plan can tell you when it’s time to hire new people.
No entrepreneur is an island.
In fact, the world of business is so deeply entrenched as a team sport that there is a whole new term for those of us who go it alone: solopreneur.
Which sounds lonely.
But if your business has any kind of shot at being a success story, then there is no way you can do it all on your own.
To the age-old question of when the best time to hire is, there are two sources of information: your business plan and how much of your own hair you have pulled out running around trying to do it all yourself.
Part of the roadmap for your business is a synopsis of your staffing needs.
That includes the management team, but also an analysis of how your business will handle the payroll in general.
At what revenue level threshold can you afford to bring on new people? What operations require dedicated staff?
These questions can be answered by your business plan.
7. A business plan can help you form strategic alliances.
Those of us who strike out and start our own businesses have to be self-reliant.
But we also know there is no way we can do it all alone.
Business is done between people, many of whom are complete strangers to one another. And a core component of smoothly running a successful business is trust.
But how can you trust complete strangers to work closely with your business?
Among other things, a business plan—perhaps from both parties—demonstrates transparency and can be used as an assessment tool.
A solid business plan can answer the question “Why should I work with you?” A business plan can also add a layer of supporting evidence for answers to the following questions:
“How do I know you won’t go out of business in six months?”
“How do you plan on delivering your product to your customers?”
“How do I know that your customers overlap with my customers?”
“How do I know that you can support my volume if we decide to partner with you?”
“How do I know you can handle your debts?”
On the flip side of the coin, if these are questions you have for a prospective strategic alliance partner, ask to take a look at their business plan. The answers to your questions will start there.
8. A business plan is a strategic growth asset.
Your doors have been open for a while now and business is booming.
You have hired a handful of employees and sales are through the roof.
You know it’s time to expand, but with expansion comes a mountain of questions.
Rent new space or buy?
Where should a new location go?
How much money should be set aside to get your second location up and running?
These are the kinds of questions that you have had to answer before—when you were planning your first location.
And if you have been diligent in keeping your business plan up-to-date, it should reflect your current position with the added layer of all your experience.
That means that when deciding whether to buy or lease new assets or new space, how many people to hire, and how to compensate them, you already have a document that lays the groundwork for the answers to these questions.
Your business plan is a communication tool.
9. A business plan can be used to set specific objectives for your management team.
When we talk about all the things that a business plan is, we can forget what it really is—THE PLAN.
A business plan is the plan for your business.
When it comes time to start talking about the best ways to make your milestones happen, your business plan is a valuable communication tool.
Are we on track for our revenue goals? Let’s take a look at the plan.
If we’re not on target, the discussion shifts to objectives that will help our management team hit them.
If your plan uses milestones that are SMART (specific, measurable, attainable, realistic, and time-constrained) then those milestones can be quickly and easily converted into high-level objectives.
10. A business plan is a reference document for your employees.
In much the same way that your plan can be used to guide and inform your management team, employees at all levels of your organization can use your business plan as a reference document.
The how and why of pricing, revenue goals, and their role within the organization, along with the roles of their team members, are all included in the business plan.
It is worth noting that as a trust measure, the business plan that is shared with your employees might not actually be THE PLAN. While open-book management practices are on the rise, there can be good reasons to keep some of the specifics out of the reach of employees.
That being said, a reference document that is a sanitized version of the business plan can be an instructive communication tool.
11. A business plan can help you deal with professionals.
Competent and experienced people gravitate toward their peers when it comes to doing business.
Having and sharing a comprehensive and professional business plan demonstrates that you are serious about success and equipped for the future.
This can be an asset when hiring new people, dealing with suppliers, assessing new ventures, and acquiring funding.
Knowing that professionals will be looking for evidence of your strategizing activities means that you can be better prepared for whatever may arise. It can also be a tool to identify others who may not have as professional a bearing.
Are you evaluating a new supplier or a potential strategic partner?
If they don’t have a business plan, tread carefully. They may not be prepared to keep pace with you as you grow.
Your business plan is a launchpad.
12. A business plan is instrumental in creating a new business.
At the risk of sounding like a broken record, this is what it is all about for entrepreneurs.
A business plan isn’t just busy work.
It is the culmination of the research and planning that must be accomplished before a business can (successfully) get off the ground.
Once it’s done, you will have a complete roadmap for success. Or, just as importantly, you will discover that your business concept was better on paper than in practice.
Either way, a business plan is absolutely essential to the creation of a new business venture.
13. A business plan can help you sell your business.
There are plenty of reasons why entrepreneurs want to sell their businesses.
Sometimes it’s just time to move on. Sometimes people get tired, they move on to new opportunities, or sometimes life just happens.
Businesses aren’t always sold because they are doing poorly, but it does happen. Those buying a business should be wary of owners attempting to jump ship.
An exit strategy should always be in the back of your mind, and it absolutely should be present within your business plan.
That way, when it comes time to sell, you can assure potential buyers that they are making a sound investment by purchasing your business, not leave them guessing as to whether or not they are looking at a dud venture.
14. A business plan is essential when you seek funding.
And that means funding at any stage of your business, whether it is a start-up or not.
Of course, new businesses and start-ups absolutely need business plans to encourage and entice investors, but more mature businesses seeking capital for expansion should also have an up-to-date plan ready to present.
Angel investors and venture capitalists get the most press, but many businesses are funded by much more mundane sources: small business loans.
In the same way that your business plan acts as a tool to convince investors that your business will provide a return for them, it is used to provide assurance to loan officers and banks that you will be able to repay your obligations.
Specifically, banks are looking for evidence of a positive cash flow, which is the number one indicator that you will be able repay any loans they may approve for you.
This is true of existing businesses seeking expansion funding as well as brand new businesses and start-ups, though the latter have an admittedly harder time demonstrating that they will produce positive cash flow.
The Bottom Line
Still not sure you need a business plan?
In theory, each of the items on this list could be taken care of by a single, dedicated document or set of documents drawn up for that specific purpose.
That’s a lot of work. Work that doesn’t have to be done when a single, standard document will suffice.
Can you get by without a business plan?
There have to be business owners out there who are flying blind and without a support system. But statistics tell us that nearly 90 percent of all new businesses fail within the first five years. There might be a correlation there.
Crafting a comprehensive business plan is not fun.
It is tedious work.
But it is necessary work, and it produces a large payoff.
At the end of your business-planning journey, you have produced a highly versatile, very useful tool that will follow you as you write your entrepreneurial success story.
Doesn’t that sound like it’s worth the effort?
One more thing...
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