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Plans: Do you really need a business plan?
when a business plan is essential
But even sophisticated and successful entrepreneurs tend to think of a business plan as something that you do only when you are starting up a brand new business.
In fact, there are more times when a business plan is called for than starting up a business. The seasoned entrepreneur needs a plan more often than does the novice business owner.
Like it or not, if you like success, you need a written business plan. Every business, large or small, will be more successful with a written business plan.
If you're just starting a business, it’s plain stupid not to do it. The time it takes to write the plan will be repaid by the new understanding that comes from asking and answering the right questions, some of which you have never thought about systematically unless you have written a business plan.
If you're already in business but have never written a business plan, there’s still a big payoff. Writing it will put you in a much better position to evaluate the challenges, opportunities and risks that go with changes you’re looking at.
In particular, a business plan is a must in any of the following events:
You want to open a new business.
Starting a new business is a big deal. You have to have a good idea, flesh out all the details needed to put it into operation, and be firmly convinced of your ability to make it work. Having it all worked out in your head is one thing, but this is something like having a novel all worked out in your head except for the detail of writing it down.
It’s only when you write the document that you realize the actual magnitude of starting and running a business. You may already think you have it worked out in your head, and to some degree this is true. But when you actually write the plan, you have a chance to scrutinize the nuts and bolts of running that business.
Writing the business plan forces you to think through systematically what is involved.
Every new business has one thing in common. The entrepreneur is convinced that his product or service is unique in his marketplace. No one ever thinks, "I'll make big bucks by opening another coffee shop just like the other dozen in the neighborhood."
Entrpreneurial wannabes invariably overestimate the importance of offering a unique product or service. A powerful USP is crucial but there is much more to business. There are also all the dreary parts of the business, from threading your way through the regulatory maze to keeping books and paying taxes.
Nearly all businesses have a great deal going on in the background besides the primary business activity. If this were not so, there would not be a huge number of new service organizations created to handle all those things like health care plans, payroll taxes, billing, etc. They exist for a reason: to free small business owners from a hundred humdrum tasks.
Make sure you properly define a successful business plan. If you work hard to write a business plan and discover that your plan shows that you can't make money on your idea without making some pretty wild assumptions, that is a successful business plan. You’re making a big mistake if you approach planning any other way: it is in part an evaluation of prospects.
If your plan shows you the business is a bad idea, you may have lost some time, but you've also saved yourself time, money, and heartache that would have resulted from chasing a hopeless cause. It is far wiser to appraise your chance for success realistically before you commit your time and money to a new enterprise. Not every good idea is feasible. The business plan lets you look before you leap.
As you are considering an entirely new business, much of the planning will involve numerous assumptions. You'll need to make assumptions about costs, labor, the number of potential customers, pricing, and many other factors. The fewer assumptions you have to make, the better. This is why, insofar as is possible, you want to base your planning on research rather than guesswork. Market research might sound involved and intimidating, but it needn’t be a multimillion dollar deal conducted by Harvard MBA’s. A lot of it is commonsense investigation and even the smallest business can afford to gather secondary research and conduct some modest primary research.
learn a great deal about your prospective venture
by writing the plan. Once you start implementing
the plan, you'll be far better equipped than you
would have been if you had just jumped in with both
feet. Not only will you have a written plan for
guidance, you will have started to hone your own
planning abilities, giving you an edge over your
Planning for Business Expansion
If your business is growing, eventually such expansion will make it worth your while to create a business plan that explores the opportunities that the growth might provide. For example, a production-based business might be able to acquire additional or better production equipment because the volume of business has reached a level that justifies the expense. Or, it might be time for a retail establishment to consider the costs, benefits, and risks of opening a second business location.
Planning for growth also can reveal some of the disadvantages of getting bigger. For example, there are a variety of regulatory requirements that kick in as your workforce grows. Careful planning can help manage the costs associated with complying with these rules. As the number of employees approaches the threshold for application of additional rules, you'll be able to choose between increasing the permanent workforce and alternative methods of getting the job done.
Launching New Products
An obvious way for an existing business serving an existing market to expand is by developing new products or services. This is definitely a time when you'll want to write a business plan. If you have not already set aside the time and resources need for the new project, you’re going to have to revisit your existing business plan, integrating the new product into the overall plan.
Either of the following situations would justify creating or amending a business plan:
offering an innovative new product different from anything yet available, e.g., the first personal computer, cell phone or instant oil change service.
enhancing or modifying an existing product or service repackaging of existing products
If you are seeking to expand by going after new markets, you definitely need to do some serious business planning. To penetrate new markets, you will have to face many of the same issues that you addressed when you first went into business. And you'll also have to deal with having to split your time between your present business and your new venture.
Here are three common ways to enter a new market:
your operations to include a new geographic market
While the phrase "new geographic market" suggests a large local chain expanding across the country, many small businesses also locate in multiple markets. For example, the owner of a coffee house located right next to a subway station could expand into a new geographic market just by opening another place down the line. Even though the new coffee house might be minutes away, it means a whole new crop of commuters and local residents constituting an entirely new geographic market.
Deciding to enter a new geographic market calls for a business plan. While many things will remain the same, you cannot safely just clone your business operation and be confident of success. You'll have to research the demographics of the new location to make sure that the target market is big enough to support your operations.
Entering a new market is equivalent to beginning a whole new business. If you thought it was worthwhile to plan when you first started out, the case for creating a business plan before entering a new market is equally compelling. If you didn't create a business plan when you started out, now is a good opportunity to see what can be gained by doing so.
New Customers in Existing Market
You can grow an existing business by going after new customers who are in your area but who don't do business with you. There are many ways to do this. For example, you might change your pricing structure to reach up or down the economic ladder, or advertise in a different medium.
But before you start taking the steps needed to reach that new audience, wrote a business plan. This will help you evaluate if the increase in business will justify the time and effort you'll expend.
How do businesses reach new customers? Some offer new products or services that appeal to people outside the existing customer base. The fast food chains did this when they began offering a wide variety of food outside the standard fare. A person who would never eat a fried hamburger might be willing to have a salad.
Fast food chains and others also try to attract new customers (and retain existing ones) by establishing drive-through service. Now, people who were unwilling to deal with parking are potential customers.
The risk that the fast food restaurants took in going after that extra busines was large. They had to redesign food preparation and service areas, install new equipment and fixtures, and completely alter the traffic flow through their parking lot. You can be sure that they didn't take the risk without carefully assessing whether the costs and required changes in operations would be worth it.
Are there people who never ate fast food before they could get it without leaving the driver's seat? Probably. It might not seem like a great basis for differentiating a group of people, but you can use a business plan to assess all the foibles of your potential new customers. You might be surprised at what you find. Human beings are complex and the human psyche difficult to understand.
For example, seeing how successful cake mixes were, one manufacturer, seeing that it was the speed and convenience of the product that drove their explosive sales, thought he saw a real hole in the market by developing a cake mix that was even more convenient. The housewife didn’t have to add eggs and oil, just water, and the result was an excellent cake indistinguishable from those made by adding these.
Housewives stayed away from the product in droves. The problem was that the housewives felt that it was "cheating" to just add water. Unless they did something more than this, they felt like they weren’t really cooking. They felt like they wouldn’t deserve the praise their home baked cake would earn them if all they did was add water, stir, and put in the oven.
It is hard enough to launch a new product -- nine of ten new products fall on their face -- so it only makes sense to give yourself every prospect of success by building a business plan based on sound market research.
New Distribution Channel
Existing businesses can often expand by offering their products and services through a new distribution channel. Many businesses that once sold goods strictly by mail order have now opened retail outlets in fancy malls. For example, certain brands of franchised fast food can now be bought, pre-cooked, in grocery store freezers. The decision to exploit a new distribution channel presents risks and opportunities that must be carefully weighed in advance. A business plan gives you the vehicle for that analysis.
A few years back, one of the first fast food chains considered making its hamburgers available in the frozen food section of grocery stores. Up until that time, the chain had marketed its products exclusively through its retail outlets. A business plan provided the framework for assessing whether this new sales channel was worth considering.
The marketing sections of the plan explored issues such as who (and how large) this new customer base was, how to package and price the hamburgers, and what the impact would likely be on the chain's existing restaurants.
The financial portion of the plan analyzed the potential for profitably exploiting this additional sales channel. It contained estimates relating to number of units sold, expenses of production and distribution, and how long it would be before the costs were recovered through sales revenues.
The action plans provided a mechanism for organizing and evaluating the myriad operational issues that the expansion created. It answered questions such as: who cooks the burgers that are frozen and sold at the grocery store? How do they get to the stores? What impact will the higher volume of business have on costs, staffing, relationships with suppliers, etc.?
Major elements of a marketing plan:
The situation analysis describes the total marketing environment in which the company competes and the status of company products and distribution channels.
The opportunity and issue analysis analyzes the major external opportunities and threats to the company and the internal strengths and weaknesses of the company, along with a discussion of key issues facing the company.
The goals and objectives section outlines major company goals and the marketing and financial objectives.
The marketing strategy section provides the company's marketing strategy statement, summarizing the key target buyer description, competitive market segments the company will compete in, the unique positioning of the company and its products compared to the competition, the reasons why it is unique or compelling to buyers, price strategy versus the competition, marketing spending strategy with advertising and promotion, and possible R&D and market research expenditure strategies.
The sales and marketing plan outlines each specific marketing event or action plan to increase sales. For example, it may contain a summary of quarterly promotion and advertising plans, with spending, timing, and share or shipment goals for each program.
Business planning is about turning your dream into a reality. A business plan is the document you create when you take an idea for a commercial endeavor and work through all the factors that will have an impact on the successful startup, operation, and management of the business.
Smart entrepreneurs plan, not because accountants or business advisors tell them to, but because they understand that it increases their chances for success. Sure, there are successful businesses whose owners fly by the seat of their pants and never create a written plan. But they succeeded despite the lack of a formal plan, not because of it. How much better might they have done had their good ideas been coupled with some solid planning?
Those who have decided to embark on a new enterprise have probably already taken some steps to confirm the viability of the new business.
Creating a written plan is the next logical step in that process. For example, a business plan can be the vehicle that carries your new idea from the conceptual and planning phase down the road to the building and operational phases. Or, it may help to establish your business's credentials for purposes of obtaining bank financing or investment by future partners. A plan for an existing business may just deal with a single aspect of your business, such as a new product introduction and its impact on financial management and other ongoing operational issues.
Here we'll address your key questions about business plans, including:
What can a business plan do for you? Why go to the trouble of documenting what you know will work? What events trigger the need to create or update a plan?
Preparing to put the plan together: do you know who your audience is? How will you gather all the information that you need? What should the plan look like?
Writing the plan: how will you organize and present your plan? What documents will you include, and what will each provide to a reader?
the completed plan: how do real world results compare
to the plan? What do you do when things go wrong
or the unexpected occurs? Business plan case studies:
what would a sample plan for a manufacturing concern,
a service provider, and a retailer look like?
What a Business Plan Can Do for You
Some people think you only write a business plan in order to convince potential lenders or investors to provide financial backing. This is wrong.
A well-developed plan can serve as one of your most important management tools. A good plan will provide a blueprint and step-by-step instructions on how to translate your idea into a profitably marketed service or product. It can serve as an invaluable management tool, delegating responsibility and authority.
Remember that no two business plans will look alike. There are a number of key considerations that will play an important role in shaping the content.
These considerations include whether you're writing the first plan for a new business or business opportunity, or a plan that updates or supersedes an already existing plan.
Obviously, your business's position in the life cycle will have a significant impact on the type of planning that's needed. An ongoing business might require a plan that relates primarily to a new market that it wants to enter, or a new product that it wants to introduce.
There are two angles to consider the value of a business plan from.
What are the benefits of a written plan? What events trigger the need for a business plan?
If you're just starting out in business, a written business plan can help you organize all the pieces that will have to come together to make your business a success.
A business hoping to expand its operations in some way can achieve the same benefits. A well-established business trying to grow out of a business-as-usual rut can use a plan as a modeling tool to examine various options before committing to one.
Many small business owners feel that they can keep track of everything without the need to write it down. A written plan, after all, is really just the embodiment of the internal planning that every business owner does anyway. However, the structure a written plan provides makes it more likely that you will consider all relevant factors and that nothing important slips through the cracks.
Benefits of a business plan
What justifies the additional time and energy you'll spend creating a written plan that presents a blueprint of your business idea? An increased chance for success. More specifically, a plan can be:
check when you first examine the feasibility of
your business idea, which forces you to consider
all relevant factors your business's resume, which
will be vital in dealing with lenders and outside
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