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Four Reasons You Need a Business Plan
When I am asked to explain why business planning is so important, I like to quote Lewis Carroll. In Alice’s Adventures in Wonderland, Alice comes to a fork in the road and asks:
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
For me this scene shows perfectly the problems of not having a goal or plan for your business. Without a plan (or using a cookie cutter business plan template) a business is essentially rudderless, and day-to-day activities are likely to be haphazard and reactive, in stark contrast to those businesses implementing a well thought out business plan.
The following represents a list of my top four reasons a firm needs a business plan.
1. To map the future
A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help you manage your business more effectively. By committing your thoughts to paper, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can detail alternative future scenarios and set specific objectives and goals along with the resources required to achieve these goals.
By understanding your business and the market a little better and planning how best to operate within this environment, you will be well placed to ensure your long-term success.
2. To support growth and secure funding
Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek outside funding. Despite the fact that the market for funding is highly competitive, all prospective lenders will require access to the company’s recent Income Statements/Profit and Loss Statements, along with an up-to-date business plan. The former helps investors understand the past, whereas the business plan helps give them a window on the future.
When seeking investment in your business, it is important to clearly describe the opportunity, as investors will want to know:
Why they would be better off investing in your business, rather than leaving money in a bank account or investing in another business?
What the Unique Selling Proposition (USP) for the business arising from the opportunity is?
Why people will part with their cash to buy from your business?
A well-written business plan can help you convey these points to prospective investors, helping them feel confident in you and in the thoroughness with which you have considered future scenarios. The most crucial component for them will be clear evidence of the company’s future ability to generate sufficient cash flows to meet debt obligations, while enabling the business to operate effectively.
3. To develop and communicate a course of action
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively considered and the company is positioned to focus on key activities. The plan can assign milestones and ultimately help to monitor progress.
4. To help manage cash flow
Careful management of cash flow is an essential requirement for all businesses. The reason is simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point–where total revenue equals total costs–is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important.
Cash flow management then becomes more vital when businesses pursue investment opportunities where there are significant cash out flows, in advance of the cash flows coming in. These opportunities need to be assessed against any seasonal variations in the business and the timing of the flows. If you are a “cash-only” business, you can bank the income immediately; however, if you sell on credit, you receive the cash in the future and may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency, so a well structured business plan will help you manage funding requirements in advance.
Contact me to help you design the right plan for your business!
