Question: What are some of the main arguments for writing a business plan?
Here are 20 good reasons to write a business plan. Please note, however, that a business plan is not necessarily a traditional formal business plan. It ought to be a lean business plan that gets reviewed and revised often. It ought not to be static, used once, and then forgotten.
These apply to all businesses, startup or not:
Key elements of a lean business plan
- Manage the money. Plan and manage cash flow. Will you need working capital to finance inventory purchase, or waiting for business customers to pay? To service debt, or buy assets? To finance the deficit spending that generates growth? Are sales enough to cover costs and expenses? That’s planning.
- Break larger uncertainties into meaningful parts. Go from big vague objectives to specific numbers, lists, and tables. It’s compatible with the way most humans think. A plan makes it easier to estimate and visualize needs, possibilities, and so forth
- Set strategy. Strategy is focus. It’s what you concentrate on, and why. It’s who is in your market, and who isn’t; and why and why not. It’s what you sell, to whom. You need to set it and then refer back to it, frequently, as things change. You can’t revise something you don’t have.
- Set tactics to align with strategy. Tactics like pricing, messaging, distribution, marketing, promotion have to work and they have to align with strategy. You can’t manage a high-end strategy with low-end pricing.
- Set major milestones. Concretely, what is supposed to happen, when? who is responsible? Humans work better towards specific milestones than they do moving in general directions. New product launch, website, new versions, new hires. Put it into milestones.
- Establish meaningful metrics. Of course that includes money in sales, spending, and capital needed. But useful metrics might also include traffic, conversion rates, cost of customer acquisition, lifetime customer value, or calls, emails, ads, trips, updates, hires, even likes, follows, and retweet. Good planning includes methods to track.
Dealing with business decisions
- Set specific objectives for managers. People work better with specific objectives, especially when the come within a process that includes tracking and following up. The business plan is the perfect tool for making this happen. Don’t settle for having it in your head. Organize and plan better, and communicate the priorities better.
- Share your strategy selectively. Let other people involved with your business know what you’re trying to do. Share portions of your plan with key team leaders, partners, spouse, bankers, allies. Don’t you want them to know.
- Deal with displacement. You have to choose, in business; particularly in small business; because of displacement “Whatever you do is something else you don’t do.” Displacement lives at the heart of all small-business strategy.
- Decisions on space and locations. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn’t that be in your business plan?
- Hire new people or not. Who to hire, why, and how many. Each new hire is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.
- Make asset decisions and asset purchase or lease. Use your business plan to help decide what’s going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?
More on sharing information
- Onboarding for new hires. Make selected portions of your business plan part of your new employee training.
- Manage business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.
- Lawyers, accountants, consultants. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.
- When you want to sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it’s worth and why they want it.
- Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.
The standard arguments that apply more to startups
- Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.
- Estimate starting costs. Aside from the general in the point above, there’s the specific estimates that list assets you need to have, and expenses you need to incur, in order to start a new business.
- Seek investment for a business, whether it’s a startup or not. Investors need to see a business plan before they decide whether or not to invest. They’ll expect the plan to cover all the main points.
- Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.
- Vital for your business pitch and summaries. You can’t really do a good business pitch without knowing already the key parameters you estimate in your business plan, for headcount, starting costs, and of course milestones and key strategy and tactics.