I think it’s safe to say that nearly all business experts agree that all entrepreneurs can benefit from having a business plan. Why is a business plan important for your startup? According to a study by Palo Alto Software, entrepreneurs who have a business plan are about twice as likely to successfully grow their business, attract investors, and get loans than those who did not have one.
What is it about a business plan that makes it such an essential ingredient for success? Let’s take a closer look!
12 Reasons Why a Business Plan Is So Important
1. It 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.
2. It helps you understand your industry, market, and competition better.
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).
3. It enables you to assess 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.
4. It gives you 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.
5. It can help you address flaws in your master plan.
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.
6. It can help you identify the right talent 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, managing payroll—these 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.
7. 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.
8. It can help you set priorities and manage your time.
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.
9. It will help you 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.
10. It helps open the door for getting financing or bringing on investors.
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.
11. It helps you make sound decisions and better manage your business.
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.
12. It will serve as a tool for communicating your ideas with stakeholders.
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.
What Should a Business Plan Include?
The sections of a business plan may vary for different businesses. Many business plans include the following segments:
An overview of the company’s purpose and goals. Typically, it includes a summary of the products and services, objectives, market opportunity, growth potential, and other significant details to pique interest and impel the reader to review the rest of the business plan.
Provides vital details, such as the business name, business structure, location, mission statement, and objectives.
Products and Services
Description of the company’s products and services and their competitive advantages.
Often consists of three analyses:
- An industry analysis to assess the general market that the business is entering
- A target market analysis to identify and quantify who the business intends to sell its products and services to
- A competitive analysis(to identify the business’s primary competitors and their strengths and weaknesses
Describes what the business will need to operate. For example, this might include property, inventory, equipment, supplies, staff, etc. An operational plan will also include the company’s workflow and production processes.
Management and Organization
A brief account of the business’s management team’s professional backgrounds, skillset, and capabilities.
It contains several financial reports to demonstrate short-term and mid-term financial forecasts. For example, this might include a sales forecast, cash flow statement, balance sheet, and profit and loss (income) statement.
Supporting data and documentation that provides additional detail about what is in the other sections of the business plan.
What Are the Risks of Not Having a Business Plan?
Several potential risks that entrepreneurs might face if they neglect to write a business plan for their startup include:
- Running out of money because they haven’t identified all of the startup costs involved in launching the business.
- Unable to sustain running the business down the road because they failed to identify all ongoing costs involved in operating the business.
- Selling products and services that aren’t profitable because they didn’t identify all the time and labor involved in providing them.
- Not attracting customers because there is no market need for the company’s products and services.
- Not attracting customers because competitors’ products and services are superior.
- Facing fines, penalties, and even suspension or administrative dissolution of their company because they didn’t identify their business compliance responsibilities.
All bad stuff, right? I could go on and on about possible downsides. But I believe those examples amply demonstrate why it is important to have a business plan!
Set Your Sights on Success With a Business Plan
Napoleon Hill once said, “Plan your work and work your plan.” That’s sound advice, especially when starting a business.
As you work your plan, contact CorpNet to help you with all of the business formation and compliance filings you’ll need to launch your company successfully. We’ll be with you every step of the way as you form your LLC or incorporate, designate a registered agent, obtain an EIN, apply for licenses and permits, and more!
Berry, Tim. Why Plan Your Business? Look At This Data. Retrieved from https://timberry.bplans.com/real-data-on-the-success-of-business-planning (December 30, 2019)
Table 7. Survival of private sector establishments by opening year. Retrieved from https://www.bls.gov/bdm/us_age_naics_00_table7.txt (December 30, 2019)