Why Your Business Needs A Business Plan

If you have started or are in the process of starting a new business and have tried to secure funding for it, then by now someone has told you that you need a business plan.  And if you are like many entrepreneurs, you nodded in agreement and then walked away wondering, “Why do I need a business plan?  My idea is the greatest thing since Instant Pudding; I just need help getting started and then I am going to be rich.”  If only business and raising money were that easy.  The fact is that if you are serious about being a successful entrepreneur, you ought to have a written business plan. 

What is a Business Plan?
The short answer is that a business plan is a written document that provides a broad range of information about a company and its strategic approach in a concise format.  Preparing a plan forces a company’s management to think through every aspect of its business model: organization, both legal and administrative, product, production, research and development, market, sales and marketing, finance, and even (in many cases) social responsibility.

In broad terms, there are three important functions of a well-conceived and executed business plan: it is a guide for the management and development of the business, a medium for communicating with potential suppliers and strategic allies, and a sales tool for attracting funding for the business.

Guide for Management and Development
“The business did not plan to fail, it failed to plan,” is a well-worn cliché.  Like all clichés, there is a fair amount of truth in it.  Launching and growing a profitable business is an undertaking that faces long odds.  Those odds become more favorable for those management teams that have the good sense to plan well.

A Coopers & Lybrand (now PriceWaterhouseCoopers) study done in 1998 concluded that firms with written business plans increased revenues 69% faster over a five-year period than those without them.  Although this is an impressive statistic, it might be even more interesting to learn what percentage of new businesses survived at all over that five-year period.  It is likely that those with written plans lasted longer as well.

Medium for Communication
When a business is new or has a limited operating history, it is more challenging for it to establish relationships with important vendors, suppliers, or strategic partners.  A professional business plan can be used to introduce your company and its mission to these potential partners.  In much the same way that a good resume can provide critical information about an individual to a prospective employer, a written business plan can provide essential information about a company, its management, and its strategy to other businesses.

Sales Tool for Attracting Funding
Whether you are applying for a Small Business Administration loan, seeking venture capital, or attempting to convince rich cousin Randy to back your business, a business plan is an essential part of your pitch.  Although each type of lender or investor will have its own criteria for deciding whether or not to fund you, having a solid business plan is critical.

No one is going to lend money to or invest in a company without knowing that its management is capable, its product is marketable, and its business model is – at least potentially – profitable.  Your business plan is one of your best opportunities to demonstrate these characteristics.

Conclusion
A thorough business plan is essential for any company that is serious about its future success.  Whether it is a one-person shop or a high growth potential technology business, its chance of succeeding and attracting partners, advisers, and/or investors is better with a written plan.

About the Author:  Al Lierman is the Founder and President of Planigent, Inc., an independent planning consultancy.  Visit Planigent for more infomration and business planning software tools.  (www.planigent.com)