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Writing a business plan may seem unnecessary, especially when you really just want to start running your business. But for you to be successful in raising money and getting people interested in your idea, writing and updating a business plan for your company is a must-do.
More than 80% of small business owners update their business plan at least once a year, according to a recent survey of over 500 businesses with less than $5 million in annual sales. Those entrepreneurs understand that a business plan is more than just pieces of paper needed to apply for new financing. It’s a living document — a the result of the mental exercise of creating a roadmap to profitability — which includes actionable steps to continue operating and growing after reaching the break-even point.
“There’s no substitute for a business plan,” says Mike O’Malley, the retired owner of two successful apparel companies and a mentor with small business advice non-profit SCORE. According to Mike, it’s imperative to know where you’re going and how you plan to get there, and then to periodically compare that plan to reality to see how you’re doing; otherwise you’ll be “flying without instruments in the fog.”
You Need a Business Plan to Secure a Loan
“Spelling out your goals forces you to coalesce your thoughts and drive in a certain direction,” says Jack Bernard, a retired healthcare executive and business plan coach with SCORE. “But the more pragmatic reason is because no one will lend you money without one.”
Ask any lender, friend or bank, and they will rightfully want to see a business plan to decide if your idea is worth making a small business loan. You can find templates for business plans (and just about any document) on sites like Docstoc for $10-20 per month, which makes the process a lot easier than starting from scratch.
Write a Business Plan to Think Through Your Business
This is your chance to explain your product or service, and emphasize its unique value proposition which will drive customers to choose you over your competitors. You can also highlight the size and growth of the market, and how you plan to sell products, make money and raise capital. Describe how you’ll achieve your specific goals in a set time frame, usually one to three years out. Along with executive and company summaries, key components of these plans include details on marketing, implementation and your financials.
A marketing plan defines who your market is, how you plan to reach those customers, and milestones of success. Laying out a specific number of units you intend to sell and how you can achieve that number will determine approximate projected revenue and expenses without wasting paper on flowery words with little substance, Bernard says, and those assertions should be based on solid research and real data.
To test your assumptions, talk to people in your industry who aren’t direct competitors in your service area. “Most people are interested in talking about themselves and how well they’ve done,” Bernard points out. They’ll be more likely and better positioned to give you a good idea of sales to expect, especially after the buzz of the grand opening fades.
When conducting competitive research, you don’t need to overthink it — sometimes it just takes some time and effort to get the information you need. “It may just be a matter of making 20 or 30 calls to similar outfits to find out their pricing structure. There’s a big difference between being passionate and being illogical,” Bernard adds.
Your Business Plan is Your Action Plan
Details about all the resources your business needs, including personnel and non-personnel, become your implementation plan. That means taking stock of contracted service providers like accountants and bookkeepers, employees, leasing or buying workspace, and equipment maintenance.
“A real fault of many small businesses is not building in enough time to recoup startup expenses,” Bernard cautions. “Monthly projections of revenue will show you when your break-even point occurs, and if you accurately quantify revenue in your marketing plan and expenses in your implementation plan, then that information becomes your financial plan.”
Perhaps finally, the main reason to write a business plan is to spell out a vision for your company with a research-based understanding of reality, Bernard adds. “You’d be surprised how many entrepreneurs don’t know what they really want to do.”