Recently we were contacted by a confused entrepreneur.
He was working on his business plan and was unsure how to outline his financial projections.
And the information he was looking at online was confusing.
Unfortunately, this is pretty common.
The reality is writing a good business plan is not easy. It takes time and effort. But it is well worth the investment.
Consider that those who write business plans are 2.5x more likely to become entrepreneurs. According to a study by a team of researchers, 71% of fast-growing family firms (smaller businesses) had a business plan (sometimes called a strategic plan, growth plan or operational plan). The study defined fast-growing as having over 92% growth in year-over-year growth. (Source: Upton, N., Teal, E. J., & Felan, J. T. (2001). Strategic and business planning practices of fast growth family firms. Journal of Small Business Management,39(1), 60-72.)
So, how does a Business Plan make businesses more profitable?
A business plan lays out a roadmap for your business. Everyone needs a road map. Without a road map, businesses and business owners can get distracted, lose track of their target customers, or run out of capital to sustain their business.
A business plan outlines a road map by:
- Laying out goals and milestones
- Identifies strategy
- Reducing risk
- Ensures financial feasibility
Laying out Goals and Milestones
There are lots to do and keep track of when starting a new business. Here are only a few of the things new business owners have to juggle when starting a new business or managing a business expansion:
- Hiring the right talent,
- Negotiating lease terms,
- Managing contractors,
- Setting up their financials systems, e.g. accounting, bookkeeping etc.,
- Marketing strategy implementation,
- Customer messaging,
These are just a few examples of the many things entrepreneurs have to manage, never mind delivering the main product or service the business provides.
The bottom line is that entrepreneurs have a lot to manage, and a Business Plan helps organize it and sets targets or benchmarks to follow. These targets become an easy reference for the entrepreneur to know if they are on the right track.
A business plan forces you to think about your business strategy. The process of developing your strategy forces you to answer difficult but critical questions like:
- What are your strengths and weaknesses
- What market opportunities are available
- What are the threats that impact my business
- How are you going to stand out from the competition
- Are the revenue projections realistic, and how much money do you need to be profitable
- What essential skills are required to be profitable
One of the many reasons banks and lenders require business plans before lending or investing money is that they know it can reduce the risk of failing.
Here are some of the top reasons why businesses fail and how having a business plan can reduce that risk:
They do not deliver value for their target customer.
Being clear on the value proposition for your business is critical. A business plan helps you better understand market trends and identify your target audience. When writing a Business Plan, you identify your ideal customer, clarify the problem you are solving for them and describe the value you provide.
Their marketing techniques are ineffective
An essential component of any Business Plan is identifying your marketing strategy and how much you will spend on marketing. Completing a marketing strategy and determining how to reach your ideal customer can save you lots of money in wasted advertising that isn’t getting your perfect customer.
They are unable to compete against market leaders
When entering an industry that large prominent players dominate, a Business Plan forces you to think about how you will compete in this David and Goliath situation. In some cases, where the business owner is working with a good business plan writer, they may realize they can’t compete. While this is often disappointing for the business owner, it is much better than starting the business and losing money, time, and lots of heartaches.
Inability to cover expenses and run out of cash
A good Business Plan forces you to outline your projected expenses and revenues in detail. When a business owner starts to operate their new business, referring to the business plan can be helpful.
For example, if the business plan calls for $5000 a month in rent but the lease rate negotiated was $6500 a month, going back to the business plan to identify how this increase will impact the business cash flows will give the business owner a better idea of what to anticipate.
They can then make adjustments such as reducing expenses in other areas to compensate for increased rental costs.
Weak team leadership and not hiring the right individuals
Another reason businesses fail is because of ineffective leadership. One of the critical roles of leadership in a business is to plan and understand the factors that impact the company’s success or failure.
A Business Plan can provide leaders with the information they need to plan and adjust to changing conditions adequately.
It’s not that Business Plans are 100% accurate; in fact, most Business Plans will not be accurate. Nonetheless, the plan provides a roadmap that serves as a reference guiding leaders in their decision-making in the first few fragile years of operation.
Ensures Financial Feasibility
Business Plans get businesses funded.
An effective Business Plan outlines the investment needed to start or expand, allowing the business owner to ask for and secure the appropriate funding required.
Without a detailed financial plan, most banks and lenders will not consider the business for funding.
Furthermore, knowing how much to price your product or service is a critical component of a financially feasible business plan. Proper pricing of your service or product can be the difference between a thriving or a losing business.
A good Business Plan outlines a detailed pricing strategy. The pricing strategy is typically based on the company’s position in the market, e.g. low-cost or high-end products or services and expected market penetration.
Putting it all together
In this article, we made the case that Business Plans are essential.
Yes, we are biased in that opinion. However, plenty of studies and research demonstrate this is true.
Hopefully, you understand the benefits of having a Business Plan and the risks of not having a good plan before launching your business.
Having a professionally written Business Plan proves that you’re serious about your business and helps set your business in the right direction.
We will leave you here with a quote by Benjamin Franklin, “If you fail to plan, you are planning to fail.”
Happy Business Planning!