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Why do entrepreneurs need a business plan?

Post a Comment February 1, 2010 – 5:27 pm | Permalink |  Print This Post |

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A business plan is a comprehensive, written description of the business and its allied activities of an enterprise. It is a detailed report on a company’s product(s) or service(s), production techniques, markets and clients, marketing strategy, human resources, organizational model, requirements in respect of infrastructure and supply chain, funding requirements and sources and uses of funds.

There are many important reasons for drawing up a business plan. Some of the more significant ones are as follows:

1. Analyze the feasibility of your Idea: Helps You Decide to Proceed or Stop

This is potentially the most critical aspect while deciding on a business venture. All ideas seem robust and achievable initially at a blue sky thinking phase, but the real scenario is only revealed once a proper business plan is drafted. Understanding the feasibility of the idea is definitely the most important insight that a business plan gives to entrepreneurs. You, as the prospective business owner, must be convinced of the soundness of your proposal. A well drafted business plan enhances your confidence towards your idea. With a business plan it is no more just an idea it is now backed up with strong evidences of sustainability, operational feasibility and achievable goals.

2. Planning Improves Your Odds of Success

Many people take a business venture as a gamble, a play of luck. We would argue that it is not just luck; however, a venture without a business plan is definitely a gamble. A business plan analyzes your risks and rewards, help you strategize the objectives, prepares you for potential market driven volatility & risks.

Case: Think of a scenario where you start or expand a business venture and gamble yours or the bank’s or investor’s money. What are the scenarios here? If you’re right, you make a profit and pay back the loans and everyone’s happy. But if your assumptions are wrong, you will experience the discomfort that comes with failure.

Research shows that most new or small businesses fail to achieve their desired outcome. Our experience shows that a large proportion of small startups do not have a well-defined business plan. Having a well drafted business plan helps improve the chances of delivering a successful venture.

3. Valuable Insights: Helps you Improve your Business Concept

Having a business plan allows you to see how by changing business parameters different scenarios can be simulated. You can then analyze each scenario to optimize your business requirements. This ability to fine-tune your plan and business design creates a roadmap for success.

Case: For example, let’s say that your idea is to start a business by importing Korean leather jackets. Everything looks great initially. Then you read an article about the declining exchange ratio of your currency to Korean currency. After doing some homework about exchange rate fluctuations, you decide to increase your profit margin on the jackets to cover anticipated declines in purchasing power. This change shows you that your prices are still competitive with other jackets and that your average profits remains constant as you are now covered for any likely decline in exchange rates.

4. Helps You Keep on Track

Many business owners spend countless hours firefighting, simply because they haven’t planned ahead. A well drafted business plan gives you a clear course toward the future and makes your decision making easier. Some problems and opportunities may represent a change of direction worth following, while others may be distractions that by referring to your business plan will enable you to avoid. A properly written business plan with realistic projections gives you a benchmarking tool to measure your performance against.

5. Communicate your idea

Business plans is a formal document with a definite and widely accepted standardized structure. You may have difficulties in explaining your idea to an investor or a prospective partner without one. A business plan formalizes this communications. It contains all the details needed and is a business reflection of your idea. The scope of misunderstanding or attenuation of understanding is greatly reduced. The structure of a business plan is simple yet comprehensive. It is never a piece of literature but an informative document, practical enough to convey the idea.

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