There are many reasons why it makes sense to create a business plan. Consider the following advantages of doing so.
Perhaps the single most essential advantage of a business plan is using it to convince yourself whether the prospective business is actually a good idea. The plan is a good place to test assumptions about what business conditions will be needed to make the entity a success. Realistic modeling with the plan is a good way to decide whether there is a reasonable chance of success, or whether it makes more sense to try some other business idea.
A business plan should be based on a vision for how the firm positions itself within the market. This is useful for deciding whether the products and services to be offered to match its market positioning.
The process of creating a business plan is useful for identifying which priorities are most critical for ensuring that the goals set forth in the plan will be accomplished. This is useful for allocating money and other resources to the right activities.
The activities stated in the business plan should represent the best possible tactics to support the firm’s strategy. By laying out tactics within the business plan, one can evaluate whether there are any areas requiring more or different tactics. This format also makes it easy to decide whether there are any mismatches between the firm’s strategy and its tactics.
A business plan should contain milestones, noting that goals that are expected to be completed by specific dates. For example, a new product should be released by March 15, orders should be received from five new customers by June 30, or the western sales region should be opened up by September 1.
Having a business plan makes it easier to see if you have considered every aspect of a business and whether each area adequately supports the others. For example, are there enough salespeople to generate the sales listed in the plan? Has enough fundraising been budgeted to ensure that the cash will be available to build that new warehouse? Is the engineering group being given enough resources to develop the new product line that launches in the third quarter?
With a business plan in hand, it is easier to work through the list of activities that must be completed and assign responsibility for them. This is essential for figuring out which employees are effective and which are not.
A business plan contains a cash flow analysis, which is useful for determining when the business is expected to have cash flow problems. Having this information available makes it easier to plan for fundraising activities to ensure that the business is always properly funded.
Since a new company does not have any financial statements yet, many lenders and creditors will want to see a business plan instead. This will give them some comfort regarding how realistic the firm’s prospects for success may be. This is especially important when trying to attract new investors, who want as much detail as possible before they will be willing to invest any money.
With a business plan in place, it is easier to spot instances in which actual performance is better or worse than expected performance. Depending on how the plan is structured, it may be possible to identify variances each month, allowing for ongoing changes to the business to bring its results into closer alignment with the plan.
A business plan may include a set of performance metrics that represent how well the organization is expected to do during the planning period. These metrics should be targeted at just those performance issues that really matter, such as the percentage of visitors to the company online store that complete a purchase, or the proportion of goods sold that are returned by customers.
It is worth returning to the “make a go/no go decision” that we listed as the first advantage of a business plan. This concept is worth considering on an ongoing basis as a business starts up, in order to evaluate how it is doing. For example, if several months have passed and there is still no immediate prospect of generating a profit, it might be worthwhile to compare this outcome to the expectations outlined in the plan, to see if there are any options available for turning the situation around. If not, it may be time to shut down the business, rather than running out of cash further in the future and then closing it down.