WHY A BUSINESS PLAN?
What Is It?
Prior to addressing the question of “Why a business plan?”, it would be appropriate to describe just what kind of beast we’re talking about. The best description that we have run across succinctly defines “business plan” as “A set of financial forecasts surrounded by their substantiation”. Does that mean that a business plan is nothing but glorified budget? In a way, Yes!
Business Plan vs. Budget
While it may be helpful to think of business plans as budgets, business plans and budgets differ markedly in several respects. First, budgets are normally short-term affairs whereas business plan forecasts typically go out three to five years. Second, when it comes to supporting data, budgets are usually pretty thin whereas the assumptions underlying forecasted revenues and expenses in a business plan must not only be laid out in gruesome detail, but must be supported with credible sales and marketing research. Thus, another way to describe a business plan might be “A budget on steroids”.
Frankly, good business plans are rare. They are rare by virtue of the fact that they require a disciplined approach to financial forecasting that, for most businesses (particularly startups), is arduous and time consuming. So, Why bother?
Early Stage Enterprises
There is no stage of a business’ life that would not be more efficiently managed with a well thought-out business plan. However, for startups the business plan is a virtual necessity. The startup needs to select a form of organization i.e. “C” corporation, sub-chapter “S” corporation, limited liability company etc. and ascertain its personnel, plant, equipment and capital needs. These latter, in turn, can only be ascertained once the company determines whether it will be vertically integrated, i.e. perform its own R&D, manufacture its own products, sell through its own sales force, or whether it will outsource any or all of these functions.
In all likelihood, none of the foregoing questions can be answered prior to determining the length and complexity of product development efforts, the size of the addressable market, the extent to which the market has been/will be penetrated by competitors and the likely market share to be acquired by the subject company in the near to intermediate future. In essence, the business plan, and the routines necessary to its preparation, serve both to create and evaluate the business model thereby bringing order and clarity to a process that is often characterized by chaos and confusion.
Later Stage Enterprises
The utility of a business plan is by no means lessened as businesses mature. Emerging and established enterprises need to periodically subject all of the assumptions upon which their business models are based to the same critical analysis (hopefully) employed upon initiation of the business. For emerging and established businesses, the business plan fosters critical thinking and innovation by compelling reexamination of long-held (entrenched?) theories.
Enterprises Seeking Financing
When the subject is financing, business plans often play an essential role. Regardless of whether the subject business is in the startup, emerging or established stage, many banks will require a business plan as a condition of extending credit. Those banking institutions that do not require a formal business plan will almost invariably pose questions the answers to which would most efficiently (and, possibly, most convincingly) be advanced in a business plan. Should the subject business wish to consider financing via the sale of its debt or equity securities, the business plan will be an absolute necessity to gain an audience with any angel network, venture capital firm or investment bank.
Enterprises Considering Mergers or Acquisitions
Regardless of whether the subject business seeks to acquire other concerns or seeks to be acquired, the business plan offers the most efficient means for potential acquisition partners to evaluate the transaction and determine whether to initiate serious discussions. Where an acquiring corporation wishes to finance the transaction, in whole or in part, with its debt or equity securities, the acquireor’s business plan will be a critical tool for the target’s management in estimating the value of the acquireor’s securities and determining whether, and to what extent, it will accept the acquiring company’s securities as payment for the acquisition.
However tempting it may be, the process of writing a business plan should not begin with posing to the business’ accountant or attorney the query, “What will you charge me to do it?”. Nor should the job be a “Welcome aboard!” assignment to the junior sales rep hired last week. No one has greater knowledge of the fundamentals underlying a given business, nor greater insight as to how these fundamentals may (or should) evolve, than the business’ senior management. Farming out business plan preparation risks farming out the very expertise essential to the task. Message to the heavies: Bite the bullet and take a crack at the first draft!
Websites for Additional Information
Googling “business plans” brings up thousands of sites offering advice (of varying utility) as to business plan preparation. We have found the following sites to be particularly helpful:
Small Business Administration
Service Corps of Retired Executives
Wall Street Journal
Walker Stone Ltd.
For reference materials concerning business plan preparation, you may wish to consider the following:
Pinson, Linda. Anatomy of a Business Plan: The Step-by-Step Guide to Building a Business and Securing Your Company’s Future. Out Of Your Mind . . . And Into The Market Place, 2013.
Balanko-Dickson, Greg. Tips and Traps For Writing an Effective Business Plan. McGraw-Hill, 2007.
Abrams, Rhonda. Successful Business Plan: Secrets & Strategies. The Planning Shop, 2010.
“Hands On” Review
Finally, for a “live” look at your business plan or for help with a plan preparation hurdle, consider speaking with a member of SCORE (Service Corps of Retired Executives). SCORE members can be reached at http://www.score.org/.
That old saw “Failing to plan is planning to fail!” is applicable here. Day-to-day business operations are primarily concerned not with questioning, but with implementing, the current business model. In contrast, it is the purpose of the business plan to facilitate, even compel, planning at a strategic level whereby that very business model is dissected, probed, examined and, thereby, improved. The vitality of every organization depends both upon getting it right at the outset and reinventing itself as the competitive environment evolves. The business plan and the process of its preparation go a long way toward ensuring success on both counts.
We would welcome the chance to apply our experience and expertise to your business opportunity. To learn more about how we may be able to assist you in meeting your business goals, click on our Home page, Areas of Practice, Contact page or call us at 717-534-9993.