Why a Business Plan Is So Important
We’ve all read the stories of million-dollar businesses that started with a few ideas jotted on a scrap of paper or a bar napkin. But in reality, how many of those businesses grew to million-dollar sales without developing a business plan at some point? A business plan helps you answer important questions such as what is the best business model, what is the future path of the business, and how is the business going to reach its goals?
Beyond that, formally-developed business plans serve a number of purposes:
- Helps You Articulate Your Vision – A business plan gives you a means for capturing your entrepreneurial vision in writing. It enables you to fine-tune your aspirations and recognize where there are gaps or inconsistencies in what you want to accomplish. It also helps you spell out your business’s purpose and describe the products and services you’ll offer in detail. Rather than keep that info in your head, a business plan frees up your mind to concentrate on what you must do to fulfill your vision.
- Helps You Understand Your Industry, Market, and Competition – As you work through the process of writing a business plan, you’ll have an opportunity to gain valuable knowledge about your business strengths, weaknesses, opportunities, and threats. You’ll learn a lot through conducting industry, market, and competitive research. Many entrepreneurs make assumptions about these things, and research is the only way to validate preconceived notions. A business plan helps you better understand your competition, the market you’re entering, and customer trends and preferences. It also helps you recognize possible roadblocks (which could come in many forms, such as the regulatory environment, technology, and other forces within or beyond your control).
- Helps Access the Viability of Your Business Idea – According to data provided by the U.S. Bureau of Labor Statistics, only about half of private-sector businesses started in 2014 survived into 2019. Surely, the entrepreneurs who started those now-defunct businesses didn’t set out with the goal of failure. It’s more likely that they neglected to do the work involved to assess the feasibility of their business ideas and create a plan to guide them through the startup process and beyond. A business plan will help you identify red flags in advance. It’s an excellent way to do a “reality check” and recognize warning signs of impending doom. With a realistic view of whether your business idea has a chance of success, you can make an informed decision about whether to move forward, cease and desist, or alter your course.
- Provides a Road Map for Launching Your Business – A business plan is also important because it provides direction as you work through the many tasks involved in starting a business. Writing a business plan helps ensure you’ve thought through all of the considerations and requirements. It forces you to think through important decisions in advance and set goals and objectives for which you want to aim. Moreover, a business plan will help keep you on track with all of the tasks required to start your business and operate it legally. For example, registering your business entity type, applying for the licenses and permits you’ll need to obtain, and other mission-critical details.
- Helps Address Unseen Flaws – By capturing your vision in a business plan, you’ll be equipped to share it and get feedback. Seek the honest, unbiased thoughts and advice of trusted professionals, friends, family members, and colleagues who will be willing to give you their honest, unbiased thoughts. Doing so can help you identify problem areas that you couldn’t see on your own. From there, you can fine-tune your plan.
- Helps Identify the Talent Needed for Moving Your Vision Forward – Starting a business is time-consuming and there may be tasks that will require specialized expertise or skills that you personally do not possess. Understanding legal matters, creating financial reports and forecasts, developing a website, and managing payroll are just a few of the responsibilities that you may not be able to handle on your own. A business plan will help you identify resource needs so that you can begin to look for employees, advisors, contractors, or companies with the knowledge and talent you require.
- It Can Equip You to Find the Right Suppliers – A business plan will help you identify what materials you’ll need to offer your products and services. In turn, it will shed light on the criteria you must look for in potential suppliers. For example, if an entrepreneur plans to manufacture all-vegan, organic spa products, the business plan will help dictate the standards the company will look for in its vendors.
- Helps You Set Priorities – By seeing all the moving parts involved in starting your business in one place, you can decide what needs your attention first and what can wait. A business plan will help you keep track of what you must do and determine how to allocate your time, energy, and resources wisely.
- Helps Set Realistic Goals and Objectives – A business plan will help make you more intentional about setting goals and objectives for your company. Moreover, having goals in writing facilitates a higher level of accountability for your long-term vision. It provides an incentive to look at your business’s potential realistically and to question assumptions. By using your business plan as a guide, you will be reminded to focus attention on both the operational and financial objectives of your startup.
- Helps Attract Investors and Obtain Financing – Lenders like banks and credit unions and other institutions will want to see a business plan. Investors will want to see a business plan so they can assess if the business idea will be a sound investment. A business plan is essential for securing funding (such as from bank loans or equity financing) or attracting investors (like venture capitalists or angel investors). Sure, a dazzling presentation akin to what you see on Shark Tank may pique investor interest. However, you’ll want to provide a well-written document that potential investors can review to evaluate the opportunities and risks of financing your business idea.
- Helps Cultivate Sound Decisions – Having a business plan allows you to make better decisions because it helps prevent decision-making on the fly. It gives you strategic direction, so fewer outcomes are left to chance. Not only is a business plan important for startups, but it’s also a valuable tool for established businesses. All businesses change and grow. All industries evolve. Therefore, a business plan should be approached as a living, breathing document that needs to adapt to the circumstances at hand and its environment. Entrepreneurs should review and update their business plans regularly. This is especially critical when they see shifts in their market, competition, industry, company growth, financial status, and other critical areas. By keeping your business plan current, you’ll be better equipped to navigate change and make adjustments to stay on the path to success.
- Serve as a Communication Tool – You can use your business plan to communicate your vision and business projections with key stakeholders. Potential lenders, investors, project partners, suppliers, key employees, major clients, etc. may rely on the details in your business plan to assess whether working with you will be a sound decision for them.