Everyone around me wants to start a new business. Everyone wants to be the next greatest entrepreneur. But 99.9% of them seem to lack the understanding that a business plan is not just important, but vital.

When launching a new venture or expanding on an existing one, the most important step will be the construction of a business plan. The plan must include your short and long-term goals for the enterprise, details on the products or services you wish to offer, and the market opportunities you have anticipated for them, as well as specifics on resources you require, and how you plan to utilise them to reach your goal in the face of competition.

Preparing an ample business plan is no easy task. Spending hundreds of man hours on it is not far-fetched, depending on how much data you have already gathered. Such an effort is necessary if you are to crystallise and focus your ideas, and test your resolve about entering or expanding your business. When finished, your business plan will act like any map, and help guide the user from start to destination.

There are several key benefits for preparing a business plan:

• This systematic approach to planning enables you to make mistakes on paper as opposed to in a real-life market place. One potential entrepreneur found that the local competitor he believed was a one-man band was in fact the pilot operation for a nation-wide chan of franchised outlets. This indeed caused an overwhelming effect on his market entry strategy! Another entrepreneur found that at the price he proposed, he would never recover his overheads, or break even.
• Once the business plan has been completed, it should make you feel much more confident about your ability to set up and operate the venture. It may even compensate for lack of experience and / or capital, provided you have other factors in your favour, such as a strong market gap for you to fill.
• Your business plan will allow you to see what resources you require, more specifically how much money is required, what and when it is needed, as well as how long it is needed for. Under-capitalisation and early cash-flow problems are two major reasons as to why new businesses fail, hence a strongly prepared business plan can help reduce such risks. Whilst researching, one can experiment with a range of alternative strategies, and thus pick out the ones that make best use of scare financial resources.
• It would be an exaggeration to say your business plan is the key to sources of finance. It will however, help you display your entrepreneurial ability and managerial talent to the full, aiding in communicating your ideas to others in a way that is easy for them to understand – including the reasoning behind your decisions and ideas. These ‘others’ could be bankers, potential investors, partners or advisory agencies. The better they know what you are trying to do, the better they will be able to help you.
• Putting together a business plan gives you an insight into the planning process. It is this process that is vital to the long-term health of a business, and not simply the plan that comes out of it. Businesses are dynamic, as are the commercial and competitive environments they operate in. You cannot expect every event recorded on a business plan to occur as written, but the knowledge and understanding created by the process of business planning will prepare the business for any changes that may occur, and so enable it to adjust quickly.

Despite these many valuable benefits, thousands of would-be entrepreneurs still try to start a venture without a business plan. The most common among such are businesses that appear to either not require any or much capital at the beginning, or whose founders have funds of their own; in both cases it is unnecessary to expose the project to harsh financial appraisal.

There is an overused thought that customers will pay all cash immediately, and suppliers will wait indefinitely to be paid, during which the business can use such funds to finance itself. Such model customers and suppliers are much harder to find if ever than optimistic entrepreneurs think. Regardless, two important market rules apply: either the product or service on offer fails to sell like hot cakes, and mountains of unpaid stockpile builds up (all of which need to be financed); or it does sell like mad and more financially strong entrepreneurs are attracted to the business. Without the staying power that adequate financing provides, you and your new venture is dead.

Those would-be entrepreneurs with funds of their own, or worse still with funds borrowed from ‘innocent’ friends and relatives, tend to think that the time spent on preparing a business plan could more usefully and enjoyably be spent looking for a new office, buying a new car, or setting up a new computer. In essence, anything that inhibits them from immediate action is considered time wasting.

Because most people’s view of their business venture is flawed in some important respect, it follows that jumping in at the deep end is risky. However, with a business plan, flaws can be discovered cheaply and far in advance; whenever such flaws are found in the marketplace, they are almost always found at a much higher and fatal cost.

There was a common myth at the start of the Internet boom that the pace of development in the sector was far too fast for business planning. The first generation of dot.com businesses and their backers seemed happy to pump money into what they called a ‘business’ or a ‘revenue’ model. These ‘models’ were little more than brief statements followed by wishful thinking. A few months into the new millennium, and a sense of realism came to the Internet sector. Now, only ventures with well-prepared business plans have any chance of getting off the ground, or being supported in later-stage financing rounds. If you can’t put together a proper business plan, you can’t start a new venture. Simple.

2 Responses to “Why bother with a business plan?”

1. Gabriele Philips Says:
   October 16th, 2007 at 4:45 pm

   Very good article explaining the importance of a business plan. A budding entrepreneur should also understand that no one business plan is the same. If you are starting a new company, you want to show how you will succeed. If you are expanding an existing business, you want to show how you will succeed with the strengths you have, as well as the weaknesses you have.

   Tim, maybe you could write a business plan template for your next blog entry on the subject?

   Gabriele

2. Jason Says:
   October 23rd, 2007 at 5:05 pm

   I will be using this for my Business Studies Coursework!

   Thanks

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