Creating a detailed business plan takes time and effort. Consequently, some new entrepreneurs skip this crucial business start-up step and dive straight into getting the business off the ground.
There is nothing to say that the headlong approach to starting a business will guarantee failure. And when you are excited about a new venture, it's understandable that you want to get the company up and running as soon as possible. However, inadequate planning is the most common of all the reasons for business failures. Indeed, even a business that fails because of a lack of working capital might not have suffered that fate if the cash-flow planning had been more thorough.
If you are still not convinced you need a business plan, read on. Here are 10 compelling reasons why it would be best to write a business plan before launching any new venture.
Confirm the Feasibility of the Idea
Deciding that you have a winning business idea is only the start of the process. You then need to break down the idea and assess its feasibility. When you first have an idea for a business, your enthusiasm for the venture might cloud your judgment. There will be hurdles that you may not have considered. You may not have considered all the steps required to make the business run smoothly. Writing a detailed business plan will ensure you consider all the angles and highlight any previously overlooked issues and barriers to success.
Determine the Funding Requirements
A significant part of preparing a business plan is creating a detailed budget and cash flow forecast. You will need these financial forecasts to determine the initial start-up capital requirements to fund setup costs and working capital. It's easy to overlook expense items if you don't sit down and crunch the numbers. Consequently, preparing financial projections is another step toward confirming viability and ensuring that the business does not run out of cash in the start-up phase.
Develop Marketing Strategy
A crucial part of developing a business plan is defining a target market and assessing the competition. This process will lead to the development of a detailed marketing plan. Who is your typical customer, for example? What marketing strategies will you use to reach your target audience, and what type of brand message will resonate with potential customers? You will also need to define the unique selling points that will set your product apart from the competition. These are typical tasks undertaken as part of the business plan development.
Having a viable product and identifying the target market is only the beginning. You also will need to deliver that product. And it's best to have all the necessary organizational and back-office functions in place before the first sale. Preparing a detailed plan of how the product or services will be produced, delivered, and supported will identify the need for logistics partners, infrastructure, employees, software, and more.
As a new business, you will have no trading history. Consequently, the business plan will be a crucial document to raise pre-launch finance. The business plan also will help you obtain finance post-launch. The existence of an initial plan demonstrates sound management, And the accuracy of your initial forecasts will add credibility to updated forecasts when you apply for loans later.
Attract Management and Employees
Start-ups need to be cautious about hiring employees too soon. Nevertheless, your business may require a management team and workers on board from day one. However, you may find that people are reluctant to join a new company, particularly in a job-seekers market, when opportunities with established businesses are plentiful. A polished business plan could be enough, though, to allay the fears of prospective employees and tempt the best talent.
Negotiating with Vendors
No trading history also means no credit history. This lack of a credit score is unlikely to hinder efforts to obtain credit from suppliers of office supplies and other items. However, larger-scale purchases might pose more of a challenge. For example, property owners might be reluctant to enter into a long-term rental agreement with a start-up. Crucial suppliers of raw materials or goods for resale might only offer limited credit facilities. However, a detailed business plan with financial forecasts will improve your negotiating position with vendors.
A business plan should not focus exclusively on the best possible outcomes. It should also identify risks and outline strategies to mitigate those risks. What if sales do not hit the target, for example? Have you created an alternative cash flow forecast for this scenario, and how would you raise additional working capital to cover the shortfall? Do you have sufficient cash reserves to cope with the unexpected? Without adequate planning, issues like these can cause the demise of a new business.
You will need to monitor progress once the business is trading. The best way to monitor progress is to track critical KPIs (key performance indicators). One critical KPI you will be watching will be the sales. Still, it's equally important to monitor factors such as gross margins, delivery times, lead conversions, customer satisfaction, and, of course, cash flow. All these crucial performance indicators are a product of the financial forecasts prepared with the business plan.
The process of writing a business plan helps you to define how the business will operate and the targets that need to be achieved for the venture to be a success. The process might reveal difficulties you have not previously considered. Your risk assessment might even uncover troubling possibilities. But if you identify and plan for barriers to success, you will be better prepared to overcome those obstacles.
To sum up, a business plan is a crucial strategic tool for a start-up. The document will provide proof of concept for lenders, vendors, employees, and investors. It will help you clarify your idea, turn it into an operational business entity, and provide the targets against which you can monitor progress. It's possible to launch a business without a detailed plan. However, your chances of success will be much improved with one.