12 Reasons You Need a Business Plan Writing a business plan gives you a much better chance for success. But it does open you up to some risks.
By Eric Butow Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
This is part 4 / 12 of Write Your Business Plan: Section 1: The Foundation of a Business Plan series.
The only person who doesn't need a business plan is the one who's not going into business. You don't need a plan to start a hobby or something you do on the side for fun. But anybody beginning or extending a venture that will consume significant resources of money, energy, or time and that is expected to return a profit should take the time to draft some kind of plan.
Who Needs a Business Plan?
Startups
The classic business plan writer is an entrepreneur seeking funds to help start a new venture. Many great companies had their starts in the form of a plan that was used to convince investors to put up the capital necessary to get them underway.
However, it's a mistake to think that only startups need business plans. Companies and managers find plans useful at all stages of their existence, whether they're seeking financing or trying to figure out how to invest a surplus.
Established Firms Seeking Help
Many business plans are written by and for companies that are long past the startup stage but also well short of large-corporation status. These middle-stage enterprises may draft plans to help them find funding for growth just as the startups do, although the amounts they seek may be larger and the investors more willing because the company already has a track record. They may feel the need for a written plan to help manage an already rapidly growing business. A business plan may be seen as a valuable tool to convey the mission and prospects of the business to customers, suppliers, or other interested parties.
Just as the initial plan maps how to get from one leg of the journey to the next, an updated plan for additional funding adds another leg of your journey. It's not unlike traveling from the United States to Paris and then deciding to visit London or Barcelona or both along the way. You would then need to add to, or update, your plans. A business plan can, therefore, address the next stage in the life process of a business.
Related: How To Write A Business Plan
12 Reasons You Need a Business Plan
Business plans could be considered cheap insurance. Just as many people don't buy fire insurance on their homes and rely on good fortune to protect their investments, many successful business owners do not rely on written business plans but trust their own instincts. However, your business plan is more than insurance. It reflects your ideas, intuitions, instincts, and insights about your business and its future—and provides the cheap insurance of testing them out before you are committed to a course of action. There are so many reasons to create a business plan, and chances are that more than one of the following will apply to your business.
1. A plan helps you set specific objectives for managers.
Good management requires setting specific objectives and then tracking and following up. As your business grows, you want to organize, plan, and communicate your business priorities better to your team and to you. Writing a plan gets everything clear in your head before you talk about it with your team.
2. You can share your strategy, priorities, and plans with your spouse or partner.
People in your personal life intersect with your business life, so shouldn't they know what's supposed to be happening?
3. Use the plan to explain your displacement.
A short definition of displacement is, "Whatever you do is something else you don't do." Your plan will explain why you're doing what you've decided to do in your business.
4. A plan helps you figure out whether or not to rent or buy new space.
Do your growth prospects and plans justify taking on an increased fixed cost of new space?
Related: Do You Need To Write A Business Plan
5. You can explain your strategy for hiring new people.
How will new people help your business grow and prosper? What exactly are they going to do?
6. A plan helps you decide whether or not to bring on new assets.
How many new assets do you need, and will you buy or lease them? Use your business plan to help decide what's going to happen in the long term and how long important purchases, such as computer equipment, will last in your plan.
7. Share your plan with your team.
Explain the business objectives in your plan with your leadership team, employees, and new hires. What's more, make selected portions of your plan part of your new employee training.
8. Share parts of your plan with new allies to bring them aboard.
Use your plan to set targets for new alliances with complementary businesses and also disclose selected portions of your plan with those businesses as you negotiate an alliance.
9. Use your plan when you deal with professionals.
Share selected parts of your plan with your attorneys and accountants, as well as consultants if necessary.
10. Have all the information in your plan when you're ready to sell.
Sell your business when it's time to put it on the market so you can help buyers understand what you have, what it's worth, and why they want it.
Related: How To Build A Business Plan
11. A plan helps you set the valuation of the business.
Valuation means how much your business is worth, and it applies to formal transactions related to divorce, inheritance, estate planning, and tax issues. Usually, that takes a business plan as well as a professional with experience. The plan tells the valuation expert what your business is doing, when it's doing (or will do) certain things, why those things are being done, how much that work will cost, and the benefits that work will produce.
12. You can use information in the plan when you need cash.
Seek investment for a business no matter what stage of growth the business finds itself in. Investors need to see a business plan before they decide whether or not to invest. They'll expect the plan to cover all the main points.
Bonus: The Benefits for You
If you and/or someone on your team are still skeptical about the benefits of a business plan and how it will benefit you personally, consider some advantages that can help in your day-to-day management:
Your educated guesses will be better. Use your plan to refine your educated guesses about things like potential markets, sales drivers, lead processing, and business processes. Priorities will make more sense. Aside from the strategy, there are also priorities for other factors of your business including growth, management, and financial health. Use your plan to set a foundation for these, then you can revise them as the business evolves.
You'll understand interdependencies. Use a plan to keep track of what needs to happen and in what order. For example, if you have to time a product release to dovetail with your marketing efforts, your business plan can be invaluable in keeping you organized and on track.
You'll be better at delegating. The business plan must make clear who is responsible for what. Every important task should have one person in charge.
Managing team members and tracking results will be easy. The plan is a great format for putting responsibilities and expectations in writing. Then during team member reviews, you can look to your plan to spot the differences between expectations and results so that you can make course corrections.
You can better plan and manage cash flow. A cash flow plan within your overall business plan helps you and your leadership team make better-educated guesses about sales, costs, expenses, assets you need to buy, and debts you have to pay.
Related: How To Craft A Business Plan That Will Turn Investors' Heads
Business Planning Risks
There are risks associated with writing a business plan. That's right: While one of the main purposes of a business plan is to help you avoid risk, the act of creating one does create a few risks as well. These risks include:
The possible disclosure of confidential material. Although most of the people who see your plan will respect its confidentiality, a few may (either deliberately or by mistake) disclose proprietary information. For this reason, you may want to have a nondisclosure agreement, or NDA, signed before sending it to others.
Leading yourself astray. You may believe too strongly in the many forecasts and projects in your business plan.
Related: The Basics Of Writing A Business Plan
Ruining your reputation . . . or worse. If you purposely fill the plan with overly optimistic prognostication, exaggeration, or even falsehoods, you will do yourself a disservice. Some plans prepared for the purpose of seeking funds may run afoul of securities laws if they appear to be serving as prospectuses unblessed by the regulators.
Spending too much effort planning. You then may not have enough energy or time to actually run your business. Some call it "analysis paralysis." It's a syndrome that occurs when you spend so much time planning that you never do anything. For a lot of business people, this is a nonissue—they detest planning so much that there's no chance at all they'd forgo actually doing business and merely plan it.
Business planning can take on a life of its own. It's possible to spend so much time planning a startup that you miss your window of opportunity or to schedule such frequent updates of a plan for an established business that it becomes difficult to administer its other details. Big corporations have large staffs, which can be devoted to year-round planning. As a small business owner, you have to be more selective.
Your planning may be approaching the paralysis stage if you find yourself soothing your nerves about starting a business by delaying the startup date so you can plan more. If you notice yourself putting off crucial meetings so you can dig up more information for a plan update, suspect that planning has become overly important.
Related: What To Include And Not Include In A Business Plan
Diluting the effectiveness of your plan. If you put too much detail into your plan, you run the risk of overburdening anybody who reads it with irrelevant, obscuring details. A plan isn't supposed to be a potboiler, but it should tell a story—the story of your business.
Therefore, it should be as easy as possible to read. That means keeping technical jargon under control and making it readable in one sitting.
Explain any terms that may be unfamiliar to a reader who's not an expert on your industry. And never make the mistake of trying to overawe a reader with your expertise. There's a good chance someone reading your plan will know more than you do. If you come across as an overblown pretender, you can bet your plan will get short shrift.
It's easy to believe that a longer, more detailed plan is always better than a short, concise one. But financiers and others to whom you may send your plan are busy people. They do not have time to plow through an inches-thick plan and may be put off by its imposing appearance. Better to keep it to a couple of dozen pages and stick to the truly important material.
Expediting your plan. While some insist on endless planning, others try to speed up the process. In an effort to get a plan written quickly to show a potential investor, you may find yourself cutting corners or leaving out vital information. You don't want to take forever to prepare a business plan but using some of the business plan software programs can make it so easy that you find yourself letting the programs do more of the work. Remember, the tools are there to guide you and not the other way around. Give yourself enough time to make sure that:
- Each section says what you want it to say.
- All of your numbers add up and make sense.
- You have answers to anything readers could possibly ask you.
