Why written business plans matter
Plenty of entrepreneurs have leapt into new ventures without a formal business plan - but experts say there's value in the drafting process.
(FORTUNE Small Business) -- Dear FSB: Most entrepreneurial heroes started their business ventures without a business plan to see how viable their ventures would be. The current approach, taught in MBA classes, is to produce a viable business plan before undertaking a business venture. How relevant is the business plan these days?
- Nhlanhla Damoyi, Johannesburg, South Africa
Dear Nhlanhla: Very relevant! For every hero succeeding without a plan, there are scores more who watched their business lurch from one crisis to another.
"You need to put more time upfront into planning, as you won't have much time on the back-end," says Sean Wise, a venture capitalist with Wise Mentor Capital, a Canadian boutique advisory firm.
If you are looking for outside funding - from a venture capitalist, a bank, a government or nonprofit agency, or an individual - the investor will want to see what you want to do with your business idea, and whether you have really thought it through. Investors care about all components of your business, from delivery methods, to legal restrictions or requirements, to cash flow and taxes.
So if you are not looking for capital, then you don't need a business plan, right? Not quite.
The business plan is a blueprint: It provides direction and guidelines for the business. All the things the investor wants to know about, you should think about, too.
"Isn't your time, energy and money as valuable as the investor's?" asks Wise. "Why would planning be needed for them and not for you?"
The business plan is helpful for supporting a loan application, estimating what the company's worth, defining business goals, developing processes to reach milestones, and evaluating ongoing programs for success. Plans show business owners if they are succeeding or failing.
Even if you don't write a formal plan, taking the time to sit down and figure out what you will be doing is critical. You need to know if there's a market for your products or services, and you need to know what the startup costs and breakeven points should be. You also need to set realistic expectations regarding the financial potential of your idea.
"The business plan means more than just the 30 pieces of paper and financial forecasts. It includes all the thinking that goes behind it," says Wise.
Okay, say you've had a business up and running without a plan for this long. Why bother doing it now?
All the things mentioned above still apply. The business plan will help identify any problem spots. Perhaps there are some problems keeping track of cash flow. Perhaps you need to outline a more effective marketing campaign. Perhaps you are expanding or branching out in to new areas and need a course of action. Just because you've done fine so far, doesn't mean a map can't be helpful for the rest of the trip.
An easy way to get started is to use software packages like Business Plan Pro from PaloAlto Software that ask questions and completes a document. Banks and organizations helping out small businesses can also be helpful resources. However, while software and consultants can be used to refine ideas and to ensure all key questions have been covered, it is up to the business owner to make all the decisions.