Why You Need to Write a Business Plan

Don’t underestimate the importance of writing a business plan. Having a business plan helps entrepreneurs anticipate and overcome potential problems and steer the business toward success.

A business plan is just that—a plan used by entrepreneurs to map out the method and path they will take to launch and operate their businesses.

Most businesses start out as ideas, and entrepreneurs typically have an instinctive feel for what they need to do make their idea succeed.

You can go with your gut and forego writing a business plan (many entrepreneurs do). Or you can treat writing a business plan as an opportunity to really evaluate your idea, lay out the steps you'll need to take, crunch the numbers, and work out potential obstacles before they result in lost time or money.

You'll want to include details like the size of the market for your services, how you intend to capture it, and the costs of opening and running your business, even when you've considered these factors already. Setting them down in a disciplined way allows you to validate your instincts.

A business plan can be lengthy and detailed or a short, one-pager, depending on the type of business and what you want to achieve with your business plan.

If you're seeking financing or investors, you will likely need a longer, more detailed business plan. If not, your business plan could be brief with a more general discussion of your objectives and how you expect to reach them.

The Importance of Writing a Business Plan

If you are planning to get outside financing for your business, you'll need a business plan to convince lenders and investors that your business idea is sound and that you will be able to achieve it.

Even when you aren't seeking outside funding for your venture, it's a good idea to develop a business plan before you launch your business and to revisit and revise your plan as your business evolves.

Here are just some of the reasons why you need a business plan:

To even out the odds: As a new business owner, you'll be up against some pretty tough odds. About 20% of small businesses fail in the first year, and nearly half don't make it to year five.

The most common reasons for small business failures are lack of capital, insufficient demand for the product or service, poor location, and ineffective marketing.

A good business plan will help to uncover and iron out these and other problems before they take a toll on the business.

To analyze the demand for your product or service. A solid business plan should include research on the size of the market for your product or service, a profile of the customers who would use it, and your company's advantages over the competition.

To set goals and track progress: A good business plan will include sales and revenue goals, with a timeline for achieving them, so you can track your progress and make any needed adjustments.

To determine how much startup money you'll need: A business plan should include an estimate of the costs for opening and running your business, from startup until your revenues grow large enough to finance your operations.

To determine your staffing needs. By detailing the steps you'll take to launch and operate your business, you'll be able to figure out the number of employees you'll need, the skills they'll need, and the responsibilities they'll have.

What a Good Business Plan Should Include

A thoughtful business plan should analyze all the dynamics that can impact your company's success including:

A Description of the Business You Are Starting

You should detail not only the product or service you plan to offer, but also where your business will be located; whether your customers will be businesses or consumers; whether you'll sell online, in a physical location, or both; and any other characteristics of the company.

The Market Demand for the Products or Services You Are Offering

Industry associations and government agencies are a good place to find information on the size of the market and whether demand for your products or services is growing or shrinking.

The Profile of the Customers You Expect to Attract

The more you know about the characteristics of your customers, the better you'll be able to design targeted marketing materials. Include details such as where your customers are located, their age, gender, income, education, marital status, and profession.

Your Sales and Marketing Strategies for Attracting Customers

Once you've developed a profile of the customers you wish to attract, you'll be able to compare it to the demographics of advertising vehicles like newspapers, magazines, TV shows, and social media to determine which outlets are best for reaching your customers.

The Competition for Your Products or Services

A review of the competition should also include an analysis of what sets your business apart.

The Cost to Open and Run the Business

Be certain to include sales and marketing expenses as well as rent, IT, and other operating expenses.

The Number and Responsibilities of Employees and Officers

As with costs, you want to be certain your business has the human resources it needs to operate successfully.

Financial Projections

Your analysis should include sales and revenue projections, how much revenue you'll need to break even, and your profit projections.

By comparing sales and revenue projections to your startup and operating costs, you can estimate when your business will start turning a profit, so you'll know how much cash you'll need to carry you through.

You'll also want to develop cash flow projections that show your receivables and your payables by month to avoid--or plan for--any shortfalls that might impact your credit rating.

How many of these points to include in your plan, and how thoroughly you research and analyze them, depends on how much you already know about the business you are starting.

If you've invented a brand new product that doesn't yet exist in the marketplace, you'll likely want to create a thorough business plan to determine whether customers will buy your product, what they'll be willing to pay for it, how long it will take to build awareness for your product, and the best ways to advertise and market it.

If, on the other hand, you're a hair stylist who's been working in the field for a number of years, and you have a loyal clientele whom you expect will follow you to your new business, you might cover only a few points in your business plan.

You might include pricing for services, and costs to rent space and purchase equipment to determine whether the business will generate a profit, along with an analysis of the competition to make sure your pricing is in line.

(If you have to charge customers higher prices to cover expenses, you'll want to make certain that those clients will remain loyal if they must shell out more for the same services.)

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