Most people believe that a business plan is that behemoth of a document that lenders and investors require you to make to get your money. This is one purpose of the business plan, but there are others. Business plans also aid the entrepreneur in determining the feasibility of an idea. Once your business is up and running, the plan will provide much needed direction in operating your business.
Virtually all start-up businesses must secure capital—usually from a bank or investor. The bank is offering you the use of depositors’ money that is entrusted to their care. As the trustee for other peoples’ money, the bank wants to lessen the risk of loss to their institution. A business plan shows that you’ve spent considerable time and effort into designing and predicting the financial future of the business. The cash flow statement will show capital providers whether or not you’ll be able to pay them back. The balance sheet will demonstrate how much of your own investment is in the firm, compared to the investments of others. The banker and investor will look at your plan with a “fine tooth comb” to assure him/herself that you are realistic and knowledgeable in your projections. They’ll be able to tell if and when your business will break-even, and if your numbers are realistic.
Additionally, a business plan acts as a feasibility study. It forces you to put your ideas on paper to make more rational, non-emotional decisions. You may be the best cabinet maker in town, but if there’s no market for a cabinet maker, your chances of success are slim. The business plan forces you to take a look at your competition, your start-up costs, and whether or not you’ll make enough money to pay your bills and yourself. It’s important to be enthusiastic about your business. However, that enthusiasm shouldn’t override business viability.
Lastly, your plan will be a road map or blueprint that gives much needed direction to your firm. Entrepreneurs too often get so wrapped up in day to day operations that they fail to plan. Using the plan actively will make the business owner’s life easier and will be a useful control measure to compare actual performance to what was predicted. It’s fine if your business isn’t exactly on track as planned, but if it’s not, determine why and make any necessary adjustments.
Writing a business plan is a project that involves numerous integrated steps. Many business plans have been written for businesses that have never been started. If the plan keeps you from mortgaging your house, cashing in your retirement, or investing your savings in a venture that is sure to fail, then the plan has done its job. If the plan helps you raise capital, prove feasibility, and plan for operations, you’ll increase your chance of being a successful entrepreneur.