Why You Need a Business Plan

I was going to call this column “Do You Need a Business Plan?” But in truth, every business needs a business plan. It’s a common misconception that business plans are used only for raising capital, as in “my bank wants to see a business plan before they will approve a loan,” or, “I need a business plan so I can get venture funding.”

But a business plan is really just what it sounds like: a plan for running your business. It’s an essential tool for making sure that nothing is overlooked.

The business plan will usually be divided into sections relating to the key activities of your business, such as Sales, Hiring, Manufacturing, and so on. In each section you will list the major goals and tasks to be accomplished, and the steps needed to accomplish them. The steps should be in the form of a schedule, with a clear description of when each task will be done, who will perform the task, and what resources are needed. For very small businesses you may plan a year in advance, but a more typical planning timeframe is three to five years. Obviously your plan will be more detailed for the first year, and things will change over time – I’ll discuss that a little later.

In additional to these “operations” sections, your plan will have some informational sections that will be used in setting the operational goals. For example, what is the market opportunity that your company is pursuing? How do you know that the opportunity is real… what research have you done? Who are your major competitors, and what are their strengths and weaknesses? The information sections are especially important if you are using your business plan to raise capital, but they should not be neglected even if your company is self-funded. The information you gather about the market and your competitors is literally the foundation of your business plan.

The final key piece of your business plan is the financial section. At its simplest, this is just a running budget showing your projected expenses and income on a month-by-month basis, for the next 1 to 5 years. You can create this with a spreadsheet program.

In the operations section of your plan, you included a schedule of tasks, and that schedule should match your financial plan. For example, if you said that you would start advertising in April, you would spend $1500 per month, and the result would be a 20% increase in sales, then the $1500 per month advertising expense, as well as the increased sales, should be included in your financial plan.

Banks and venture firms will require the financial plan to be in a specific format; you may need an accountant to prepare this. But even if that’s the case, start will a financial plan that you create and understand. Make sure the financial plan matches your operational plans, and be sure you understand how every number was determined!

You’ll learn a lot in creating your business plan, and avoid many mistakes. But that’s just the start. Once your business plan is complete, don’t put it away! Consult it regularly. Be sure that you are on schedule to accomplish your operational goals. Be sure your actual income and expenses match your financial plan. And if reality doesn’t match your plan, figure out why and adjust the plan accordingly.

One of my clients initially projected that 65% of her business revenue would come from services her business provided, and 35% from product sales. Six months after the business was launched, we discovered that, although total revenue was very close to the plan, the ratio of service to product revenue was exactly the reverse of what had been projected.

This raised several possibilities. Perhaps not enough effort was being spent to promote the service side of the business. Or perhaps the product portion of the business was a simply bigger opportunity than originally thought, and more emphasis should be placed there! In either case, my client needed to do some additional thinking and update the business plan based on what she had learned. She talked to clients, met with product suppliers, and eventually decided to expand this portion of her business, resulting in significantly faster growth than originally projected.

Based on experiences such as this, I recommend that small businesses review their business plan at the end of each quarter, and that they conduct a thorough update of the plan at least once a year.

Want to learn more about business plans? A great place to start is SCORE, a free resource for small businesses and a partner with the US Small Business Administration.

Learn more about Starting you Business.