Why a business needs a business plan

Business planning may be arduous, but skipping this step can leave you uninformed about your firm's place in the market. The type of information gathered during the planning process can help you foresee potential risks and develop strategies for dealing with them before they occur. Many owners return to their business plan even after their firm is up and running to help them refocus and chart a path for the future.

In addition, a business plan is a tool of communication. Banks and investors will look to your plan for evidence that your company can succeed. Your partners and employees will look at it as a blueprint for the future, bringing together disparate elements such as marketing, sales and operations into one document.

Here are the top reasons a business needs a plan:

To map the future
A business plan is not just required to secure funding at the startup 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.

To support growth and secure funding
Most businesses face investment decisions during the courses of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. However, 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. If you want to lure investors, provide information on how you will give them a return on their money, as well as how you plan to grow using their funds. Think about why would an investor be better off investing in your business, rather than leaving money in a bank account or investing in another business. And a bank will likely be interested in factors such as risk assessment, profit and loss statements and loan amounts.

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 marginalized to specific individuals and ultimately help management to monitor progress. Once written, a plan can be disseminated quickly and will also prompt further questions and feedback by the readers helping to ensure a more collaborative plan is produced.

To help manage cash flow
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite 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 startups, 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 flows going out, 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 hence 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 and hence a well-structured business plan will help you manage funding requirements in advance.

What type of plan?
The amount of detail included in your business plan is largely dependent on its intended audience. If you are a one-person startup with limited capital needs, you may simply want to describe your business goals, the market conditions and a basic strategy for the future. If you are seeking capital, in addition to the elements included above, be prepared to give your financial management software a workout.

Planning the plan
Before you start writing, do some preparation. Here are some of the main questions to focus on in the initial sections of your plan:

What is the purpose behind your company? Creating a mission statement will help you focus on why your business exists in the first place. Some statements lean towards the inspirational, but others simply describe the product or service that is being offered.

Who are your potential customers? Your marketing strategy will answer the question of who will buy your product or service. As much as possible, categorize your customers within separate market segments and analyze their particular behavior. What motivates them to buy what they do? How much money do they want to spend? How do they respond to different types of marketing?

Who are your competitors? Gather as much information as you can about other companies in your sector to prepare your competitive analysis. These are the folks that you will be studying to see how your business can do what they do - better than they do it, of course!

How will you run your business? In your description of operations, be prepared to set out exactly how you plan to manage your company on a day-to-day basis, as well as the physical necessities involved. Information included in this section relates to issues such as manufacturing, equipment, and business location. Who are your suppliers? How will you manage inventory? Will you employ staff?

Show us the money. The final part of your business plan is where your financial management software can really come in handy. The financial section describes how much it will cost to run your company, as well as predicting when you will become profitable. Factors to consider are startup expenses, operating expenses, cash flow and future profitability.

Some entrepreneurs find preparing a business plan intimidating. If this is you, there are professionals who are proficient in doing this and understand the needs of a small business. There are also numerous resources available that can help you write and hone your plan. Just remember - don't let uncertainty keep you from completing this all-important step.

Cheryl O'Neill Gowen is president and CEO of Alternative Funding Options. She works with business owners seeking cash flow from non-traditional sources, drawing on more than 30 years' experience in banking, financing and staffing. Contact her at:{encode="[email protected]" title="[email protected]"}.