If you own a small business or thought about starting one, the question of business planning usually comes up. Yet, most small businesses rarely have a written business plan in place at any time during their existence. So do you need a business plan?
There are several reasons for not starting one:
- Business plans are intimidating. Too many books exist on the subject, most with long, detailed processes on how to do it. However, most result in a plan that into a book in itself.
- The owner of the business doesn’t have the time to do it because they are too busy running their business.
- Hiring a professional to do it is costly, especially since it’s really not the owner’s plan.
- If completed, the plan sits on the shelf and is never referred to again. So why go through the effort to begin with?
- Why write it down? – I know what I want to accomplish.
What Is the Purpose of a Business Plan?
There are primarily two reasons to create a business plan: Someone outside the business wants to see it. Or, The business plan helps plan, direct, and control the business.
Someone outside the business wants to see it
This is probably the most common (and least useful) reason why a business plan is developed and usually the reason all those books on the subject exist. If the business owner (or a prospective one) is looking to raise capital from a bank or investors, they are going to want to see a plan before they start spending their money.
At a minimum, they look for assurance that the owners and management have thought the business through. It has a reasonable chance of success that will provide an adequate rate of return for the lender or investor.
Typically, this type of business plan will cover things like:
- The qualifications and experience of the owners and management (also known as an Executive Summary)
- The mission, vision, and values of the business
- Short and long-term goals
- Strengths and weaknesses of the owner and management
- The legal and tax structure (Sole Proprietor, Partnership, Corporation, LLC)
- A description of the business proposition and products and/or services to be offered
- An analysis of the industry, competition, and the business environment in general
- A customer profile
- A detailed marketing plan including the results of any market research
- Financial projections for several years
- Plans for growing the business
- An exit strategy
This is the type of business plan that quickly becomes a book. The larger the company or its aspirations, the more likely this will be the business plan written.
The business plan is used internally to plan, direct, and control the business
This is probably the least common (and most useful) reason why a business plan is developed. It could include many or all of the items listed above, but the real purpose is for the business owner or manager to think critically about the business and its operation and develop projections and standards that can be compared to actual results on a periodic basis.
Addressing the items above can be useful, in fact necessary, in doing this but there doesn’t need to be a formal presentation of them. A list of assumptions, maybe a page or two, based on the goals of the owner should be sufficient.
If variances from the projections and standards occur, the action is taken quickly to determine why they occurred and what actions need to be taken to follow through on positive results and correct negative ones.
The core of this type of business plan is a BUDGET.
A Simple Business Planning Strategy
Business planning doesn’t need to take on a life of its own. The following should be a simple but effective approach to the planning process.
- Decide what type of business you want to have or to become. Most businesses can be broken down into the owner (1) creating a job for themselves or, (2) building a business that becomes separate from them and which can operate without them and be turned over or sold to someone else in the future. Either one is fine, and one can evolve into the other (usually from (1) to (2) but figure this out and start your list of assumptions with it.
- Write a brief description (a paragraph or two) describing the mission, the business proposition, and the goals, and keep it handy so that you can refer to it from time to time.
- Create a BUDGET for at least two years on a month-to-month basis and annually for at least another 3 years (5 years in total). The budget process will force you to address some or all of the items listed above as part of a detailed business plan, but as you do, try to break them down into essential items that can be included on your list of assumptions. For example:
- What are you going to sell, when are you going to sell it, how much and at what price?
- What expenses do you anticipate and when will they occur?
- How much do you need to take out of the business?
- How much will you need to cover all of that (also known as capitalization)?
- What are the projected taxes?
- Make sure you have a proper set of books so that you can track your income and expense and be able to compare it to your budget.
- Identify any variances and take corrective action if necessary.
To repeat, this type of business planning is used to Plan, Direct and Control your business. It can be written on a page or two, plus some spreadsheets for the BUDGET and will be easy to refer to and updated on a periodic basis.
Small Business Planning: A Summary
Business planning for the day-to-day or month-to-month running of a business is essential and often overlooked or ignored. It doesn’t have to be a complicated process, but it can provide many benefits and help the business owner operate the business efficiently and profitably.
Ideally, the planning process should be done by the owner or management and not by someone hired from outside the business.
However, a professional, such as a Certified Public Accountant (CPA) who specializes in small businesses can provide assistance in the planning process. CPAs analyze the current finances of the business, asking the owner meaningful questions and assisting in the formatting of the BUDGET. They also make sure that a proper set of books are in place and up to date. This is so that results can be compared to the budget and corrective action can be taken by the owner or management.
Large companies have an employee called a Controller that handles much of the financial part of the planning process. Small businesses typically can’t afford that. But a CPA can provide valuable assistance in this area to the business at a reasonable and affordable price.