You've probably heard all the academic and formal definitions of a business plan--something to the effect that it's a document describing your company's goals and means of achieving them over the next five years. However it's phrased, though, the definition is usually abstract and uninformative. It makes a business plan sound dry and theoretical -- and mysterious -- which it is not.
Here's how I define a business plan: It's a document that convincingly demonstrates that your business can sell enough of its product or service to make a satisfactory profit and be attractive to potential backers. In other words, a business plan is a selling document. It sells your business and its executives to potential backers of your business, from bankers to investors to partners to employees.
When viewed as a selling document, the business plan takes on a new meaning. This view provides four compelling reasons for writing a business plan:
A business plan, first and foremost, should sell you on the business.
Fred Gibbons recalls that when he decided to become a founder of Software Publishing Corp., in 1980, he was about to quit a fast-track job at Hewlett-Packard and take out a second mortgage on his house to help raise $50,000 of start-up funding. He concluded that he needed to write a business plan to confirm the wisdom of those steps. In his words, the plan was his "sanity check."
If you do all the things you're supposed to do in writing a business plan, you may decide at some point in the writing process that the business doesn't make as much sense as you'd anticipated. The market isn't growing as fast as you'd thought or the gross margins aren't as high as you'd expected. And you may decide not to pursue the business. In that event, the business plan has done you a favor--it has saved you the expense and grief of pursuing a business that wasn't really viable.
Conversely, you may discover in the course of researching and writing the plan that the business opportunity isn't exactly what you'd expected, but that if you alter your focus slightly, the opportunity is even greater than you'd realized. You may change your approach to take the new realities into account, making the business more exciting than before.
A manager of a small wholesaler of cut flowers wrote a business plan in response to a demand for one from its chief investor, who was concerned about the company's eroding profits. In doing the research to write a plan, the manager discovered that competitors were devising ways to sell the freshest and prettiest flowers as special premium brands--fetching higher prices than usual. The manager decided to propose to the investor a plan for creating a special inspection and grading system so that interested customers could ensure they were getting the best of the bunch. The investor liked the idea well enough to authorize funding for the project. The new premium-brand project enabled the company to raise its prices to some customers and to attract new ones. Over the next few years, profitability improved significantly, thanks to the effort made in putting together a business plan.
A business plan sells others on the business.
When someone asks you for a business plan, they are really saying, "Sell me on this business. Turn me on."
In that sense, a business plan is not unlike the marketing materials your company produces. The advertising, direct mail, public relations, and other promotional copy your company puts together is meant to sell your company to potential customers.
A business plan is meant to sell your company as well, but to those we might call "stakeholders." These are individuals and companies considering providing support of some kind, be it funding, time, expertise, or whatever. Usually, they are bankers, investors, executives, suppliers, significant customers, and so on.
A business plan gives you confidence.
Having gone through the planning process for my own business, I know what a great feeling it is to complete a written business plan. Suddenly, I felt more in control of my business. That feeling of control was really one of confidence. I knew where my business stood and where it was going. I had also established criteria against which to compare my performance a year out. It was a good feeling.
A business plan improves your chances of success.
In an AT&T study, all the entrepreneurs were asked to rate their overall success. Those 42% who had written business plans rated themselves more successful than the 58% who hadn't written business plans. In other words, planning paid off.
This material was excerpted from Chapter 1 of How to Really Create a Successful Business Plan by David E. Gumpert.