While statistics vary dramatically based on their source, a huge number of small businesses open every year in the U.S. Owners of those businesses anticipated succeeding and being around for years to come, but their plans don’t always work out. Here’s why you need a business plan. Approximately 20 percent of new small businesses will fail within the first year, and about 50 percent will fail within five years.
Those figures are startling, and many prospective business owners back away from purchasing an existing business or opening a new one rather than taking what, on the surface, appears to be a gigantic risk. However, industry insiders suggest the risk of failure can easily be reduced by taking one vital step: preparing a comprehensive business plan before buying or opening a business.
Understanding the Importance of Having a Business Plan
One common analogy is that a business plan is like a road map that guides business owners on their journey to success. Of course, a business owner can certainly open without having a plan in place, but would you feel comfortable starting on a long road trip without a map showing the best routes to take? Traveling without a map could result in taking costly detours or not reaching your destination and, by the same token, starting a business without planning rarely results in a profitable outcome.
A business may function without a plan, but the odds of success are considerably lower than businesses with plans enjoy. Statistics demonstrate that businesses with appropriate business plans grow 30 percent faster than those without a “road map” to follow. If you’re considering purchasing or opening a business, having a business plan in place can, and likely will, make the difference between success and failure during that all-important first five years in business.
What is a Business Plan and When Should It Be Developed?
Once again, here’s why you need a business plan. First, knowing what to include in a business plan is crucial. While specific information will vary from one business to the next, there are common elements all business plans should include. As a rule, most business plans will be approximately fifteen to twenty pages, but the total may fluctuate depending on the type and size of the business.
A business plan describes the business in general terms and includes information on the products or services the business will provide. Marketing strategies must be included, and it’s always a good idea to include an explanation of how flexible those strategies are and how the business will respond to changing circumstances.
Flexibility is now a necessity, as businesses with rigid structures were unable to respond quickly during the pandemic, which proved costly and caused countless businesses to fail. Lenders and other investors will certainly pay more attention to an opportunity if the business owner demonstrates an ability and willingness to recognize impending changes and adapt to them quickly.
So, when should prospective business owners develop a business plan? In the vast majority of instances, the plan should be in place before any additional steps are taken. In other words, create a plan any time a prospective business owner needs to re-evaluate their ideas and focus on making the business succeed.
It’s also important to update a business plan throughout the years a business is owned and operated. A business plan should be a living document that’s updated as needed to stay abreast of changing conditions in the markets. Even when you’re planning on selling your business in DC, updating the plan to reflect that event is vital.
What Advantages Do New or Current Business Owners Realize When a Plan is in Place?
New or current business owners face countless challenges. Many challenges can be anticipated in advance, but others occur due to unforeseen circumstances. COVID-19 is certainly a good example of an unforeseen circumstance that would be virtually impossible to predict, but a good business plan lays the foundation for dealing with any issues that arise.
Exactly how a business plan is structured will vary depending on the business, the existing market conditions, and the owner’s plans for the future. In most instances, business owners can use a business plan template to develop a basic business plan and add to the template as necessary to flesh out the plan to meet a specific organization’s needs.
The plan’s contents help owners with immediate needs as well as establish objectives for the future. Here are just a few ways a business plan helps new or existing owners.
- Business plans are essential when seeking financing. Regardless of the funding source, lenders will always want to see a comprehensive business plan. Lenders want to know a borrower has an accurate picture of their industry and its anticipated future trajectory. They’ll also want a complete picture of the business finances, as the lenders’ exposure is governed by the financial condition of the borrower and the anticipated income from the business.
- Owners with solid plans make better business decisions. If business owners understand their financial circumstances as well business operation requirements, they’re more likely to make better decisions that impact the growth and financial well-being of a company.
- Solid business plans make identifying issues easier. With a comprehensive business plan in place, owners are better able to identify developing issues and respond to them without costly delays. Quickly responding to a problem increases the odds of overcoming the issue without incurring significant losses.
Of course, there are other benefits to having a quality business plan in place, and business experts routinely recommend working with planning professionals to identify items that should be included in the plan. Having an attorney and accountant readily available to assist with planning is strongly recommended, and that’s especially true when buying or selling a business.
Staying on Track
As noted earlier, a business plan should be a living document that’s updated on a regular schedule to ensure a business owner stays on top of existing conditions and alters their plans to reflect changes in the economy, market conditions, and evolving consumer demands. In some cases, such as during the pandemic, business owners who neglected their business planning found themselves in trouble. Lastly, here’s why you need a business plan. To avoid problems at any stage of business ownership, having a comprehensive, up-to-date business plan helps owners be part of the successful business owners’ statistical group and build a solid future.