Recently, a prospective client came to me looking for help gaining some extra resources to grow their business. He wondered what would be required to get an SBA Loan. We walked through a list of qualifications together, and everything seemed to check out just fine until it became apparent to him that he'd have to draft a business plan.
He already had a well-functioning business with a great-looking cash flow statement, so why would he need a business plan? He assumed that business plans were typically drafted for startups or new companies just trying to get off the ground, but not for an existing business entity with a proven track record.
As we continued with the conversation, we discussed how much this prospective client was looking to borrow and why he wanted a loan from the Small Business Administration in the first place. He stated that he needed about a half-million dollars. Wow, this guy must have big plans, I thought to myself.
However, when I asked what his plans were for the half-million dollars, he answered, "I just want to grow my business and expand." This perfectly illuminates the importance of a business plan, no matter the size or age. This prospective borrower wanted $500,000 and did not know how he planned to spend it, didn't have a concise plan for how each move would methodically create more revenue. Instead, he had an open assumption that an infusion of cash would simply work like magic.
Whether you have a lean startup business, a mature S Corporation, a limited liability company, or even if you're just starting with a sole proprietorship, it is always best to have a strategic business plan. This article will discuss why a solid business plan is essential and why, as a business owner, it is in your best interest to have one, whether or not you're looking for financing options!
We have all seen new stores and restaurants open in our town, and unfortunately, not too long afterward, there is a closed and for sale sign out front. It's a sad story, but 85% of small businesses fail because of cash flow problems, and many times, that depressing cash flow statement is a direct result of there not being a well-thought-through business plan in place. The responsibility of drafting business plans fall upon the ownership and management team.
As the owner, you likely created your company (or want to) because you have a vision of where you want your business to go, the impact you want it to make, and the level of income and freedom you want the company to generate. Therefore, business planning to support that vision is your responsibility, and you must organize your time, financial information, and business model or structure to achieve that dream.
You may also want to invite key personnel to help draft (or at least read through) the business plan because they'll have valuable input based on their experience in operating the company and what it looks like "on the inside" when the financial plan or organizational chart looks a certain way.
Whether you are a new or an established business, you need to write a business plan. Here are a few critical reasons a formal business plan should be in place before pursuing a business loan.
As mentioned above, getting funding (SBA loans or other business loans) based on a business idea without a business plan will be very challenging. However, having a traditional business plan will allow investors and lenders to see the potential in your business and feel confident they will see a return on their investment. You can also use the business plan as a tool to help others to see your vision and want to work with you.
A business plan can help launch your own business in the right direction from day one. A well-thought-out business plan will guide you through the steps of managing your business and help you make solid decisions as you achieve business milestones. In addition, it will allow you to think through various aspects of your business, including elements like a company description, business objectives, marketing plan, target market, etc.
This is especially important for launching a lean startup or a from-scratch new business. Business owners often have so many ideas, and having a written business plan can help narrow down and solidify company plans, providing you competitive advantages over other, more cluttered entrepreneurial minds.
Traditional business plans are generally a simple business outline covering your plans for the foreseeable future (next 3 to 5 years). It shows the path you plan to take with your business and how you intend to make money and grow. It is a living document and will likely change with your business.
Here's what's included in a business plan:
There is no wrong way to write a business plan. You can include whatever you feel may be helpful to prospective investors, bankers, or anyone you think may be interested in supporting your new or existing business. You can easily find a free business plan template with a quick Google search. A traditional business plan and a lean business plan, also known as a lean startup business plan, are the two most common types of business plans.
A traditional business plan format is precisely that "traditional." It follows a standard business plan template and requires a lot of work initially. But, again, plenty of traditional, very detailed business plan templates can be found online with just a couple of clicks. So, if you want to go the conventional route or have a more complicated, likely brick-and-mortar business, plan on taking plenty of time to draft this document.
A lean business plan or a lean start-up business plan is less common. They still use a standard business plan template but focus on the essential elements of your plan. This type of business plan "cuts out the fat," hence "lean." They usually are just a quick one-page document.
Each of these business plans is still considered a formal business plan in the eyes of bankers and investors.
The more information you can give potential investors and your lender, the more likely you will secure funding for your business. This means you want to include some vital elements in your business plan.
Other elements included in a business plan are products and services offered, an operational plan, management and organization, and appendices.
Business plans can be detailed (traditional business plan) or straightforward (lean start-up). It all depends on how much work you want to put in to set it up and how complicated your business structure may become. A viable business plan can look and be structured differently and provide its own competitive advantages for each business. But no matter which format you choose, take the time to create a complete draft that will give you direction when you need it most.
You may think this sounds great for a start-up or a new business. But what if you already have a profitable business and are looking to reach a broader audience?
You still need a business plan! Yes, investors and bankers will look at your company's history, but you still need to make them feel confident about this new venture. Writing a business plan shows them exactly how you plan to make a profit, your financial projections, and your competitive analysis, all of which makes them more confident in your new venture.
Look at it from an investor’s perspective. If they wanted to give you their money, intending that it be used to grow your business and create a profitable venture, what would they need to know about your business? On top of that, the exercise of creating a business plan isn’t just helpful to those on the outside; there are some specific ways an existing company and its owners can benefit from a new business plan.
If your business is already making money, you may find it hard to focus on growth. You might assume that updating the marketing plan or completing market research can wait until next month. However, when you write a business plan, you are moving towards proactively defining your brand and business and no longer putting things off until the future.
You no longer need to be a one-person show when a business plan is in place. Instead, organizational, financial, and operational responsibilities can be developed within the plan and quickly assigned to appropriate employees.
A business plan allows you to measure the progress of your business towards the financial goals or business goals you set. Without a plan, it will be pretty tricky to figure out if you are managing your business effectively and whether your business is progressing in the right direction.
With a new business, cash is often the first thought. New companies need to make cash to survive. But an already functioning business needs it as well. A business plan can help you make sure you are thinking comprehensively about cash management. In addition, having an established plan for cash flow can help you with operations, suppliers, vendors, and creditors.
While we're on the subject of business planning, besides a business plan, there are a couple of other programs you'll want that can also provide a competitive advantage:
One of the other plans you should have is an operational plan. This plan discusses (in great detail) the different actions your crucial personnel need to carry out to achieve your business targets, whether short-term or long-term. The plan may change throughout the business's lifetime. part of your operational plan may include your management team and how they will manage the day-to-day operations successfully.
It would help if you also had an exit plan or exit strategy. This is where you decide what will happen when you are ready to exit the business. For example, this could come into play if you ever decided to sell the business, close it down, or move toward an IPO if you wanted it to grow significantly. Alternatively, an exit plan might come into play if you suffer an accident or become unable to manage the business for any reason.
These plans are just as important as a business plan and can help your business run smoothly now and sustain the test of time and truly become a legacy for your family and your employees.
If you haven't figured it out yet, it is critical to have a written business plan. Besides helping you attract investors, secure financing, or attract employees, hopefully, writing a business plan can clarify what you want your company to become. You'll have the opportunity to act like the CEO you want to be through drafting a company description, identifying your target market, completing some market analysis, and even looking at financial projections and a financial plan. Writing a business plan is simple enough, and although many find it a tedious task, the benefits outweigh the time spent.
No matter what type of business you have or are developing, you need a well-thought-out business plan to help prove that you have a viable business idea that will last through unexpected expenses, economic downturns, and bear markets alike. A bank will not just hand you half a million dollars because you are looking to "expand."
A business plan is one of the primary documents a business owner will need to bring to the table any time they are seeking funding, trying to attract investors, or attempting to prove the business's financial health for any reason. So why keep that beautiful, complicated plan all in your head? Take a load off your shoulders and get it all out of paper - you'll be glad you did!