Top 8 Reasons You Need A Business Plan
There are, in reality, three primary reasons you need to have a business plan. Publishers, and a certain number of consumers, like to see Top 10 lists, so I arbitrarily chose Top 8 Reasons, just to be different.
Gleaned from years of working with a variety of business in putting market strategies and business plans together, here are three of the main benefits to you, as a business owner, for having a business plan:
1) Risk Prevention. What? If you’ve been in business for any length of time, and paid for advertising to promote your business, can you quantify how much revenue that advertising has generated for your business? Spending ad dollars to reach potential consumers is a risky gamble that can be prevented with a little research, identification of your market, and an effective marketing strategy. These are all elements of your business plan.
Unfortunately, a majority of business owners fall prey to the “marketing consultants” who sell radio or TV time or space in a magazine or newspaper. Don’t get me wrong, they are all excellent media resources for conveying a message to consumers, but each one has a unique delivery system, targeted audience, and ability to be effective. That’s why you’ll hear the representative say, “There are no guarantees.”
However, if you know your target market and their preferred method of receiving advertising messages they will respond favorably to, your choices for advertising become much more simple. Your ratio of success and odds of increasing sales go up exponentially. That’s one way your plan helps you prevent risk… and lose money!
Another aspect of preventing risk that your plan provides is the development of strategies to handle a down economy or reduced demand for your product or unforeseen circumstances or market trends. When you take the time to think things through and put them into a plan, you create solutions to problems you may only envision happening. Better to do this in advance instead of waiting until it happens. You then know how to react and don’t have to waste time figuring out what to do. The plan goes into action without delay.
2) Management Tool. Yes. Operating a business requires sound management principles and effective managers. One of the key elements a bank or lending institution looks at in providing financing for a business is the strength of the management team. Strong managers are confident in making difficult decisions, and that is important to the bank. If payroll needs to be reduced, lenders like to know the decision will be made for the good of the company and its bottom line.
What management needs, therefore, is a management tool to provide guidance, determine strategies, and effect changes if necessary. This is where the business plan plays a vital role. With a well-defined budget, a pivotal element of a business plan, managers have a tool they can use every month to assess the company’s performance. If sales projections are less than expected, management can implement corrective actions to improve the results. If the plan is well thought out and written with action plans that deal with uncertainties, management succeeds in turning the negative influence around.
On the reverse, if sales are better than projected, management can make adjustments to production or inventory control to meet the increased demand.
The point is that your business plan should be an ever-changing document, part of the fluid process of managing your business effectively with the right tools.
Evaluate the definition of your products and/or services at least twice a year. Do you have sufficient margin to operate in the black? How does your pricing compare to the competition across the board? Is there enough strength to keep your prices where they are and retain the business against competitive influences?
We worked with one client who was afraid to raise prices. She felt she would alienate and therefore lose customers. When we explained that without an increase she would be unable to keep the doors open, and that would eliminate all customers, she understood and raised prices.
There are times when you are working so hard you forget the reason you’re in business to begin with; the adage that you fail to see the forest for the trees is applicable. Get some outside help so you have other eyes to help you take the time to think and see golden opportunities in front of you.
3) Financing. In the economic era of Frank-Dodd legislation, banks and credit unions need to see a business plan to extend a line of credit or provide financing for your business endeavor. There are exceptions, of course.
One of our clients had gone to the bank with his updated business plan and got his line of credit extended. When he went back for financing to add an additional location, he figured he needed another update. The bank told him they were so impressed with his original update they were fine with that version of his plan. He got the funds to open a new store.
Since the economic downturn of 2008, government intervention in the banking and financial business has stifled the growth of our economy. The Fed wants banks to loan money, but keep a certain percentage of their assets in reserve funds. The result is the banks have to be more selective in the types of lending they underwrite, and as they take steps forward, there is an auditor or inspector watching every move and controlling where they can invest. It can be daunting for a business owner.
There are countless stories of business owners having a long-term relationship with a bank that comes to an end because the bank is divesting itself of those types of customers and loan portfolios. The owner stands in the street wondering which way to turn. She may have to work with a banker that is less than receptive to her operations, hopes, and dreams for her business.
The importance here is that the business plan needs to have realistic projections, and the business owner must be able to explain where the numbers came from, how they were arrived at, and how they will be met. If you fail to have the answer, your odds of getting financing are greatly reduced.
Just so you can say there were 8, here are 5 more reasons to have a business plan:
4) Create a new business.
5) Sell your existing business.
6) Share and explain business objectives with management.
7) Valuation of your business for formal transactions, such as estate transfer.
8) Deal with professionals.