The reading level for this article is Moderate
Whenever I suggest to business people that they should put together a Business Plan, they invariably have one of two replies — “We’re too small to have a fancy business plan”, or “We should, but we’re too busy to go through the process right now”. These responses highlight several misconceptions of business plans.
Too much work for little or no benefit.
The process of producing a business plan is, in and of itself, a beneficial undertaking. It facilitates management’s focus on the future as well as the present. In the process of preparing the plan, they have a chance to step back and assess where they are now in terms marketing, production, and finances. This assessment can be cause for “pats on the back” and honesty about past errors.
Looking to the future, the process allows a business person to look out five or ten years and say, “In my dreams, this is where I want this company to be”. The business plan forms the road map to get to those dreams. It gives interim targets to hit. It highlights the many challenges. It points out the company’s strengths and how to capitalize on them. It does all this by forcing the business person to objectively think things through. When they think through one area, the process requires them to think through the impact on other areas of the company. For example, given sales targets, they must now consider equipment and personnel requirements to reach those targets. Next, they must realistically analyze how they can finance these necessary resources.
The most significant benefit of a business plan is in the periodic review of actual results.
A manager/owner should take out the business plan on a quarterly basis and review their actual results to the forecast. In financial terms, this involves comparing actual numbers to budget numbers. In marketing, it involves comparison of unit sales, department sales, penetration of targeted markets, etc. This feedback allows the person to assess what worked, what went wrong, and proactively make changes to move toward their goals.
Business plans are for larger, fancier companies.
Business plans do not have to be fancy documents full of charts and graphs. They have to be documents useful in communicating what the business person has in mind. As such, they can take the form of a simple outline with budgets attached. Several key areas to include are:
- Goals. Obviously long term goals are necessary. Just as importantly, include interim goals that form the milestones of progress. It is critical that time lines be stated for the accomplishment of each goal.
Functional Strategies. A basic strategy in each functional area of the company will show how to accomplish the goals. A well developed marketing plan will show how to achieve the sales goals. An operating plan will show how to fill the sales orders. A financial plan will show how to pay for it all. Each of these plans can be written up as simple outlines with little integrating text. The content and thought process are what is important, not the form and complexity.
Budget and Cash Flow Projections. This is where small business people feel most intimidated. It is, however, the most important reality check on the rest of the plan. Can we pay for it? In the simplest form, analyze revenue and expense accounts under the projections of the plan. Given recent payment and collections history, extrapolate the impact on cash in the bank. This simple analysis will uncover any glaring critical financial problems well in advance.
This is the most damaging misconception. It is precisely in the everyday survival grind that a good business plan provides the business person the most benefit. Regular reviews of the goals, objectives, and interim targets bring everyone back in focus with what they are trying to accomplish. It provides a point of reflection. It redirects actions that have strayed. It facilitates proactive management of the chaos, rather than allowing the chaos to manage the company.
Business plans are for small companies as well as large. The small company can benefit from even a simple plan that is prepared in earnest. To facilitate completing the plan, an objective third party can effectively guide a business through the process. Thus the company gets the benefits without the administrative burden. In the end, planning to open for business tomorrow is a plan. A good business plan just takes that process to a higher, more useful level.