WHY PREPARE A BUSINESS PLAN?

WHY PREPARE A BUSINESS PLAN?

Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan. Such a plan must include your goals for the enterprise, both short- and long-term; a description of the products or services you will offer and the market opportunities you have anticipated for them; and finally, an explanation of the resources and means you will employ to achieve your goals in the face of likely competition.

" A BUSINESS PLAN WILL MAKE YOU FEEL MORE CONFIDENT IN YOUR ABILITY TO SET UP AND OPERATE THE VENTURE. "

Preparing a comprehensive business plan along these lines takes time and effort. You will need between 200 and 400 hours, depending on the nature of your business and how much data you have already gathered. Nevertheless, such an effort is essential if you are both to crystallize and to focus your ideas, and to test your resolve about entering or expanding your business. Once completed, your business plan will serve as a blueprint to follow, which, like any map, improves the user's chances of reaching the destination.

There are a number of other important benefits you can expect to arise from preparing a business plan. These include testing your ideas, building your confidence, understanding your financing needs, and giving you planning experience.

A Testing Your Ideas

This systematic approach to planning enables you to make your mistakes on paper, rather than in the marketplace. One potential entrepreneur made the discovery while gathering data for his business plan that the local competitor he thought was a one-man outfit was in fact the pilot operation for a proposed national chain of franchised outlets. This had a profound effect on his market-entry strategy!

Another entrepreneur found out that, at the price she proposed charging, she would never recover her expenses or break even. Indeed "expenses" and "break even" were themselves unknown terms before she started preparing a business plan. This naive perspective on costs is by no means unusual.

B Confidence

Once completed, a business plan will make you feel more confident in your ability to set up and operate the venture. It may even compensate for lack of capital and experience, provided of course you have other factors in your favor, such as a sound idea and a sizable market opportunity for your product or service.

C Financing

Your business plan will show how much money is needed, what it is needed for, and when and for how long it is required.

Because undercapitalization and early cash flow problems are two important reasons why new business activities fail, it follows that entrepreneurs with a soundly prepared business plan can reduce these risks of failure. They can also experiment with a range of alternative viable strategies and so concentrate on options that make the most economic use of scarce financial resources.

It would be an exaggeration to say that your business plan is the passport to sources of finance. It will, however, help you display your entrepreneurial flair and managerial talent to the fullest extent and to communicate your ideas to others in a way that will make it easier for them to understand and to appreciate the reasoning behind your ideas. Your audience could be bankers, potential investors, partners, or government agencies. Once they know what you are trying to do, they will be better able to help you.

D Planning Experience

Preparing a business plan will give you an insight into the planning process. It is this process itself that is important to the long-term health of a business, and not simply the plan that comes out of it. Businesses are dynamic, as are the commercial and competitive environments in which they operate. No one expects every event recorded in a business plan to occur as predicted, but the understanding and knowledge created by the process of business planning will prepare the business for any changes that it may face, and so enable it to adjust quickly.

Despite these many valuable benefits, thousands of would-be entrepreneurs still attempt to start without a business plan. The most common among these are businesses that either appear to need little or no capital at the outset, or whose founders have funds of their own; in both cases it is believed unnecessary to expose the project to harsh financial appraisal.

The former hypothesis is usually based on the easily exploded myth that customers will all pay cash and that suppliers will wait for months to be paid. In the meantime, the proprietor has the use of these funds to finance the business. Such model customers and suppliers are less common than optimistic entrepreneurs think. In any event, two important market rules still apply: either the product or service being offered fails to sell like hotcakes and eventually has to be financed, or it does sell like hotcakes, attracting financially stronger entrepreneurs into the market. Without the staying power that adequate financing provides, these new competitors will rapidly kill the business off.

Would-be entrepreneurs with funds of their own, or worse still borrowed from friends and relatives, tend to think that the time spent in preparing a business plan could be more usefully (and enjoyably) spent looking for offices, buying a new car, or installing a computer. In short, anything that inhibits them from immediate action is viewed as wasting time.

Since most people's initial perception of their business venture is flawed in some important respect, jumping in at the deep end is risky and unnecessary. Flaws can often be discovered cheaply and in advance when preparing a business plan; they are always discovered in the marketplace, invariably at a much higher and usually fatal cost

Copyright Ramon M. Ignacio 2008 All Rights Reserved