The Importance of A Business Plan For Your Online Business

Given the time and resource investment required to create a business plan, both established and aspiring business owners are often tempted to skip it entirely and wing it. The rationale is that the time and resources used to draft a business plan could be better utilized if channeled to the actual business and not a mere document. However, this is far from the truth.

A business plan is important for many reasons. It can help secure funding, gauge the feasibility of a business idea, inform business decisions, minimize risk, attract and retain talented employees, and provide a basis for strategic alignment, planning, and prioritization.

These are just the highlights, so be sure to read to the end for up to ten benefits of having a business plan. Let’s dive right in.

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Can Help You Secure Funding for Your Business

Whether you’re looking to secure a loan from an angel investor, a venture capitalist, or a bank, they’ll need proof that you have a good grip on your business’s trajectory. While you don’t need 200 pages of paperwork, you need something that shows your investor or lender that there’s a market for your products or services.

Among the main elements of a business plan are financial statements and income projections. When pitching your business to investors, they use these to determine whether staking their money on your business would be a rewarding endeavor. The same can be said of lenders. They’ll use the financial documents and forecasts to determine whether your business will remain profitable long enough to allow you to pay back the loan and accrued interest.

To leverage your business plan to secure funding, you need to keep it simple enough for potential investors and lenders from all walks of life to understand your financials and business model. It might also be a good idea to present your numbers visually through things like charts and graphs when pitching. Visuals are easier to understand than complicated spreadsheets.

The last thing you want is to fail to secure funding for your business solely due to poor presentation of your financials.

Provides a Way to Gauge the Feasibility of a Business Idea

More often than not, businesses are born out of the founder’s passions and interests. But while such a basis is essential for the motivation to keep going when things aren’t working out, not all passions can be turned into a profitable business. In the planning stage, you need a way to gauge whether you can make money off your passion-based business idea. After all, generating income is the bottom line for why you’re going into business.

A business plan provides a way to find out whether your grand idea makes business sense. Through its market research component, it gives you insight into your target market’s size, your potential customers’ buying behavior, who you’ll be competing with, and the general profitability potential of your industry. This information is essential because it allows you to determine the viability of your business idea ahead of time, creating a bridge between reality and concept.

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Informs Business Decisions

Another critical function of a business plan is that it helps entrepreneurs make better business decisions. Typically, entrepreneurship is an endless exercise in crisis management and decision making. However, business owners are often busy people who can’t always afford the luxury of sitting down and examining every little decision’s implications. That’s when a business plan comes in handy.

Creating a robust business plan allows you to proactively figure out the most critical business decisions and their ramifications. This way, you make most of these decisions in one “brainstorming” session, saving valuable time. Put otherwise; it acts as a reference document for critical business decisions.

For illustration, suppose you need to make a significant spending decision such as setting up shop in a new location to expand your company’s reach. In such an instance, a review of the financial forecasts mapped out in your business plan can provide the data you need to assess such a move’s viability.

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And since a business plan is never a static document, it evolves with your business as it grows, providing a reference for decision making in the long run.

Can Help Plan Your Cash Flows More Effectively

Every business will have short term expenses. Also known as operating expenses, these are outlays required to facilitate the production and selling activities. Operating expenses usually result in current assets, including cash or other assets such as inventory and accounts receivable.

To effectively plan short-term expenses, you need to understand and track your company’s cash flows. To do that, you need to closely monitor one of the three fundamental financial statements; the cash flow statement (the other two are the income statement and the balance sheet). That’s where a business plan comes in.

By evaluating your company’s cash flow statement as part of your regular business plan review, you get an idea of when cash may be tight in the future. That puts you in a better position to take the necessary action to avoid having unpaid bills in the middle of a cash crisis.

Helps Minimize Risk

When launching a business, there’s a lot you don’t know about your customers, the competition, and the industry at large. While every entrepreneur signs up for some of that uncertainty the moment they decide to start a business, there are several things you can do to reduce it, and creating a business plan is one of them.

Among the critical steps in creating a business plan are market research, industry analysis, and competitor analysis. When doing all of this, you learn a lot about the kind of environment your business will be operating in, which helps you plan accordingly. In doing so, you avoid making blind business calls, helping reduce your risk.

What’s more, the risk reduction benefit of having a business plan isn’t exclusive to startups. When your business is up and running, you’ll need to review and adjust your business plan. The review process is a great way to discover weak spots in your plan.

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It uncovers gaps and wrong assumptions you might have made when drafting your initial plan, helping minimize any negative financial implications they may have on your business. It also allows you to develop contingency plans, further reducing your risk.

Provides a Foundation for Strategic Planning, Alignment, and Prioritization

A business plan provides a way to determine how your revenue and sales goals fit your budgeted expenses. Having a clear idea of how your investment will facilitate achieving your goals will ensure that you’re setting your business up for success.

Besides providing a framework for mapping your goals to your time and money investment, a business plan also keeps your workforce on the same page. By articulating what needs to be done, when, and how it’ll be accomplished, it helps clarify the role every member of your workforce has to play to steer the company forward.

That helps rally your team towards a common organizational goal, effectively increasing your workforce’s efficiency as a whole. When every member of your team knows how the small role they play affects the company as a whole, they’ll likely be more dedicated to doing what you ask them to do. That’s because they’ll know that their work matters and that they’re an essential part of the company.

Beyond convincing your team to buy into your business’s goals from the word go, a business plan makes it easier to track your business’s progress and communicate it to your team.

Through your periodical review of your initial plan, you’ll get insight into what the goals were, how you were supposed to meet them, and how much ground you’ve made toward the same in a given period. With this information, you’ll be better placed to figure out what needs to change and communicate it to your team.

Can Be an Asset When You Decide to Sell

If your exit strategy is to sell your business, having a robust, well-updated business plan can be incredibly beneficial when that time comes. Usually, a business plan’s details are of great interest to prospective buyers because it allows them to evaluate the business before the acquisition.

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Some of the details a potential buyer would want to know about your business during an acquisition include:

The company philosophy, vision, and mission statement.
The business’s history, including its significant triumphs and failures
Long term and short term revenue and profit goals.
The organizational structure.
Employee development and retention.
The long term company growth plan.
The target market.
Major markets or accounts.
The competition facing the business and its competitive edge.
Current operational processes and planned/proposed changes to the same product/service lines.

A robust business plan will capture all of the above details and much more, giving potential buyers a comprehensive overview of your company’s operational and financial aspects. Thus, having it can make selling your business easier in several ways.

For starters, the sheer act of presenting such a document will make a good first impression on potential buyers. It demonstrates professionalism and shows potential buyers that you’ve taken the necessary measures to plan your business effectively throughout its life cycle.

And with all the details of their interest neatly organized in an easy to understand manner, they’ll take less time to evaluate your business as part of their due diligence process, effectively cutting down the time it takes to close the deal.

Another way a business plan can make it easier to sell your company is by providing a way for potential buyers to assess its potential. While it’s usually a significant consideration for buyers, it’s not always easy to assess a business’s potential. A well-documented business plan addresses this challenge by giving prospective buyers an idea of the challenges and opportunities the business may encounter in the future.

That’s a big plus, mainly because buyers will likely discount your claims about your business’s scalability potential unless such claims are backed by in-depth current and historical data. By presenting such data in an organized way, a robust business plan not only helps prove your business’s potential but also outlines a probable road map for fulfilling that potential. As long as the numbers are promising, this can work in your favor when negotiating for a higher valuation.

Lastly, a well-documented business plan can help relieve some of the anxiety experienced by first-time business buyers. It’s not uncommon for someone looking to acquire a business for the first time to sweat over their ability to manage it successfully even when they’re perfectly qualified. Sometimes, this can make them put things on hold or even quit the deal altogether.

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As the seller, you’ll want to relieve that anxiety to speed things up, and a business plan can help with that. It gives the buyer valuable information on running the business and learning from your experiences as the previous owner. With a clear picture of what you did in the past to succeed or fail in various aspects of the business, the prospective new owner will likely feel more confident about their chances of successfully managing the business and fulfilling its potential.

Increases Your Company’s Chances of Success and Survival

Through competitor analysis, market assessment, and industry analysis, a business plan allows you to foresee some of the significant challenges your business may face in the early stages. It also gives you insight into some of the opportunities in the business environment you’re looking to break into, allowing you to adjust your operational and financial objectives in advance to exploit them effectively.

And since business planning also involves developing an implementation budget, it can help figure out your business’s operating capital requirements. Doing this can go a long way to avoiding a cash crisis in the early stages of your business. A Cash crisis is one of the main challenges facing startups because it often takes some time to realize positive cash flows (AKA generate revenue).

Ultimately, such preparedness gives a business a better chance of survival in its early stages and can help prevent yours from becoming part of the 90% of startups that fail. It allows you to proactively define your target market, create appropriate pricing strategies, figure out your unique selling proposition, and determine the best ways to maximize sales and deliver products to your customers.

When your startup is up and running, your business plan will evolve with it, helping steer the company past the break-even point so you can start making profits as soon as possible. As long as you review and update regularly, this all-important document will become more about setting goals, tracking how much ground you’ve made towards those goals, and adjusting the various aspects of your business whenever necessary to speed up your progress.

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Such practices are critical to the success of any new business, and research has confirmed it. In one study meant to examine the effects of business planning on the chances of success in startups, the findings indicated that formal planning reduces the time it takes for a new business to achieve profitability and increases the chances of doing so.

Can Help Forecast Your Businesses’ Staffing Needs and Attract Top Talent

One of the critical steps in drawing up a business plan is determining your business’s operational requirements beforehand, including staffing needs.

When you anticipate your staffing needs, you can make hires ahead of time to avoid short-staffed periods as your business grows. You’re also in a better position to thoroughly screen every hire because you’re not time-bound, which allows you to handpick the best talent for your business.

Once you’ve assembled a team of talented employees, having a business helps retain them. Top-notch employees often prefer to work for companies that demonstrate the potential to stick around for the long haul because that provides job security. And while you may not provide the best compensation they can get when you’re just starting, your employees will want to know that your business is poised to grow, which would allow you to bump up their salaries.

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By providing a roadmap of your company’s expected growth trajectory and the means you intend to use to get there, a business plan addresses both of these concerns, helping you retain a talented workforce.

May Help Attract Partners

If a partnership is something you desire, having a well-documented business can help with that. Anyone you seek out for a partnership will want to review your business plan to determine whether your venture is worth investment. If you can’t produce such a document, you’ll struggle to get individuals or other businesses to partner with you.

Final Thoughts

As we’ve seen, a business plan isn’t just critical in the early stages of your startup; it can be beneficial to your company in virtually every stage of its growth trajectory. Although it’s a lot of work, we hope that these ten advantages of having a business plan will be enough motivation to create one for your business. All the best!

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