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Why do you need a business plan? Here are the reasons

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A detailed business plan offers a birds-eye view of the entire framework of an establishment

Every year, thousands of new businesses see the light of the day across the world. However, only a tiny percentage of them survive in the long run. Talking about the United States, according to the Bureau of Labour Statistics, about 20% of small businesses fail in their first year, and about 50% in their fifth year.

Research from the University of Tennessee found that 44% of businesses fail within the first three years. Among those that operate within specific sectors, like information (mostly tech firms), 63% shut shop within three years. Why so? Most studies mention “lack of business planning” as one of the reasons.

“Running a business without a plan is like riding a motorcycle up a craggy cliff blindfolded. Yet, way too many firms (a whopping 67%) don’t have a formal business plan in place. It doesn’t matter if you’re a start-up with a great idea or a business with an excellent product. You can only go so far without a roadmap, or a business plan. Only, a business plan is so much more than just a roadmap. A solid plan allows a business to weather market challenges and pivots quickly in the face of crisis, like the one global businesses are struggling with right now, in the post-pandemic world,” said Simplilearn.

What Business Plan Is All About?

A business plan is a document in writing that outlines the goals, objectives, and purpose of a venture while laying out the blueprint for its daily operations and key functions such as marketing, finance, and expansion.

A good business plan, for example, can be a game-changer for start-ups that are looking to raise funds to grow and scale. It convinces prospective investors that the venture will be profitable and provides a realistic outlook on how much profit is on the cards and by when it will be attained.

When it comes to well-established companies and large conglomerates, they also need to tweak their business plans to adapt to new operational environments and unpredictable market changes. A detailed business plan offers a birds-eye view of the entire framework of an establishment; it has several benefits that make it an important part of any organisation.

An effective business plan offers a significant competitive edge like setting realistic objectives and assigning stipulated time for those goals to be met, thereby ensuring long-term profitability. It also lets a company set benchmarks and Key Performance Indicators (KPIs) necessary to reach its goals.

A good business plan also helps to effectively organise and allocate the company’s resources, providing an understanding of the result (including financial impacts) of actions like opening new offices, recruiting staff, production change, and so on.

Though business plans vary from company to company, the blueprints of successful companies often serve as an excellent guide for start-ups and new entrepreneurs. The same roadmap also helps existing firms to market, advertise, and promote new products and services in the market. A well-thought-out business plan provides an organisation with the ability to anticipate the curveballs that the future could throw at them, thereby preparing answers and solutions well in advance.

Why You Need to Craft Business Plans?

Doing a little homework now and crafting a business plan will make your life much easier and save you tons of time later on. Here are five good reasons why every entrepreneur needs a business plan:

Need Of Thinking Through The Aspects

As entrepreneurs, we need to focus on the excitement of doing something new. For start-ups, for example, it’s all about setting the nuts and bolts together, such as setting up an accounting system or dealing with employee law.

“To write a good business plan, you have to think about how you’ll handle every aspect of your business—marketing, managing, financing, and more. You’re forced to focus on the very areas you’re tempted to skim over (which are usually the places where you need to really drill down). When your business plan is done, you’ll have a blueprint for success,” says Rieva Lesonsky, who creates content focusing on small business and entrepreneurship.

Entrepreneurship is often an endless exercise in decision-making and crisis management. Sitting down and considering all the ramifications of any given decision is a luxury that small businesses (even start-ups), especially, can’t always afford. That’s where a business plan becomes crucial.

Spotting Problems Ahead Of Time

“Would you rather uncover problems with your business concept during the planning stage—or wait until you’ve already spent money on a location, inventory, or employees? By identifying possible obstacles, your business plan will help you plan how to avoid them,” Lesonsky comments.

There are many reasons why small businesses fail, According to data from CB Insights, some of the most common reasons businesses fail include: lack of market need of the product you are trying to sell, lack of capital, inadequate team (maybe the right people haven’t been hired for the job), stiff market competition (posing a challenge towards steady profit flow) and pricing (pricing products/services too high or too low).

“The exercise of creating a business plan can help you avoid these major mistakes. Whether its cash flow forecasts or a product-market fit analysis, every piece of a business plan can help spot some of those potentially critical mistakes before they arise,” says Jared Lindzon, public speaker and Fast Company contributor.

Helps To Become Good Communicator

An entrepreneur needs to look out for business partners, vendors, or even first employees. It can be hard to convince people of the merits of a business that doesn’t yet exist. A business plan can, if communicated well, show people what you’re planning to do so they will have a better idea of whether they want to be involved.

“Planning out exactly how you’re going to turn that vision into a successful business is perhaps the most important step between concept and reality. Business plans can help you confirm that your grand idea makes sound business sense,” Lindzon said.

Whether an entrepreneur is managing a team of 100 or a team of two, he/she can’t always be there to make every decision yourself. Think of the business plan like a substitute teacher, ready to answer questions any time there’s an absence. Let your staff know that when in doubt, they can always consult the business plan to understand the next steps if they can’t get an answer from you directly.

Sharing your business plan with team members also helps ensure that all members are aligned with what you’re doing, why, and share the same understanding of long-term objectives.

To Prove The Business’ Viability

Many businesses are created out of passion, and from there onwards, they get guided by reasoning. All entrepreneurs come with visions, but they need to sell those visions, prove them viable and convince the investors that they are pumping their money into the right places.

“Planning out exactly how you’re going to turn that vision into a successful business is perhaps the most important step between concept and reality. Business plans can help you confirm that your grand idea makes sound business sense,” explains Lindzon.

Take market research for example. It is a critical component of any business plan, which helps entrepreneurs to have deep insight into their customers, competitors, and the chosen industry. Not only can it enlighten the founders starting up a new business, but can also better inform existing businesses on activities like marketing, advertising, and releasing new products/services.

Entrepreneurship is a risky business, but the risk becomes significantly more manageable once tested against a well-crafted business plan. Drawing up revenue and expense projections, devising logistics and operational plans, and understanding the market and competitive landscape can all be game changers for a company’s prospects.

To Secure Financing

“Did you know you’re 2.5x more likely to get funded if you have a business plan? If you’re planning on pitching to venture capitalists, borrowing from a bank, or considering selling your company in the future, you’re likely going to need a business plan. After all, anyone who’s interested in putting money into your company is going to want to know it’s in good hands and that it’s viable in the long run. Business plans are the most effective ways of proving that and are typically a requirement for anyone seeking outside financing,” Lindzon summed up things beautifully through these words.

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