Updated: Aug 25, 2020
While there are no guarantees in life, having a business plan is as close as you’re gonna get.
A business plan is needed because one, a lender or investor will ask for it and two, it’s really good to have a plan that will show you your industry, market, target market, competitors, goals, objectives and strategies to reach those goals.
A business plan serves three purposes:
To present to lenders/investors
As a roadmap to success
To help you better understand your industry, market, competition
Present to Lenders/Investors
When you go to a bank to ask for a business loan, the majority of the time they will ask for your business plan. They want to see that:
You are capable at running your business
You know the business you are getting into.
You have collateral
The thing you have to remember is that lenders are people. They are going to make the ultimate decision. So you have to present a clear and concise document that will convince them, that is a business plan. That’s why the majority of them ask you for a business plan. They want to see that there is a process in place to help prove your businesses viability. This includes the management, your personal ability, education, knowledge in running and making this business a success. They want to see your plan of action. And keep in mind that a bank is a business too, their product is money. So they want to see that their product is going to be bringing in sales and a profit. For this reason, if you go to a small bank, they’ll help you out as much as they can. They’ll help you with your paperwork, filing, a little mentoring. Why? Because it benefits them too. Just like any other business they are providing value with their product!
This is true for an investor or equity partner. They need to see that you are capable of getting a return on their investment. That you are the right person for the job. You can do this with a properly written business plan. A well written business plan takes experience. I have seen business plans that just miss the mark completely. And trust me, if you get bored or don’t understand the business plan, then an investor will too. So make sure to have a properly written business plan. That means writing a business plan that:
Captivates the reader (not boring),
Has the proper, accurate, and up-to-date industry and market information,
Accurate or realistic financials
And proof that you are the right person, because actually they are investing in your ability to make the business a success.
As A Roadmap to Success
A business plan works like a map, going from point A to point B. If you’re a start-up, you are starting at the very beginning and you want to launch, grow, and eventually make a nice profit from your business. For others it is already having a business profitable business and wanting to expand it. Wherever your point A is you need a plan, a viable plan that you can implement to where you want to be.
A properly written business plan will be able to describe your business to the point where anyone reading can understand it. They will be able to take away from it your business description, industry, market, goals, objectives, milestones, mission, vision, value, your skills, experience, education, and how you are going to be first, best, or innovative.
If you have an amazing innovative product/service that no one else is has, being first on the scene will be so advantageous. You’ll be able to tap into a market that’s being neglected and most likely see profitability right away. If you can provide a product/services better than your competitor you can actually steal their clients and get a strong start. Or if you can do what your competitors can just innovatively, than you might just be able to tap into a part of the market or consumers that they can’t. And with a business plan this can be mapped out and used as a decision making tool.
Understanding the Industry, Market, and Competition
Having a clear picture of what you are getting yourself into is crucial.
The industry is the classification of a group of businesses that produce related activities based on their product or services. By understanding the industry you can see the groups major source of revenue, how the economy has affected the group. The industry will show you the performance as a whole of all the businesses you are competing with. So you will be able to see if the industry is expected to continue to grow, what its growth is, how the revenue is doing, etc. Ultimately, whether or not it's a good time to enter the industry.
The market will help you understand who is buying the products/services. About ten years ago, consumers weren’t really spending money. The country was in a recession because of the housing crisis and consumers couldn’t or wouldn’t spend their money on discretionary things because they either didn’t have any disposable income or they were being frugal. If you wanted to start a business 10 years ago you would need to know this and understand how it would affect your business. Things have changed a lot since that time, and you need to know why and how that will affect your business.
By knowing your competitors you can exploit their weaknesses. Competitors are similar businesses to yours. There are direct competitors or indirect competitors. An example of this would be, let’s say you want to open a hamburger restaurant, your direct competitor would be another hamburger restaurant like Dukes and your indirect competitor would be a hot dog restaurant like Portillo's. They both serve fast food just one is exactly the same and the other one can be substituted for yours.
You also should know how they are performing in the market. Are they succeeding, do they have complaints, sub-par food or services, what are they missing? Does the market want organic farm to table food and they serve frozen? Knowing their strengths and weaknesses will help you provide better value to your market. And knowing what your market wants will help you capture a market segment that is being underserved.
Here’s a final example to help you better understand the industry, market, and competition. Let’s say you want to open up a Hamburger fast food establishment.
Your industry would be the Fast Food Restaurant Industry,
Your market would be consumers who enjoy going out to eat
And your competition would be other hamburger or similar establishments
By having a business plan you can reach your goals of getting that start-up capital or that financing to expand your business and the relevant information you need to succeed as an entrepreneur. And like I said there are no guarantees in life but having a business plan is as close as you’re gonna get!