12 Reasons Why You Need a Business Plan

The only people who don't need a business plan are those who aren't starting a business. You don't need a plan to start a hobby or a side hustle for fun. But anyone starting or expanding an enterprise that will require significant capital, energy, time, and potential profits should take the time to create some kind of plan.

Who needs a business plan?

Startups

The typical business plan writer is an entrepreneur seeking funding to start a new venture. Many great companies got their start with a business plan that was used to convince investors to provide the capital needed to start the business.

But it's a mistake to think that only startups need business plans: companies and managers find plans useful at every stage of their business, whether they're raising capital or figuring out how to invest spare cash.

Major companies seeking support

Many business plans are written by and for companies that are far past the startup stage but not quite large. These mid-stage companies may create plans to help them find funding for growth, just like startups, but because the company already has a track record, the amount they are seeking may be larger and investors may be more aggressive. They may feel the need for a written plan to help them manage a business that is already growing rapidly. A business plan may be considered a valuable tool to communicate the business' mission and prospects to customers, suppliers, or other stakeholders.

Just as your initial plan defines how to get from one leg of the journey to the next, your updated plan for additional funds adds another leg of the journey. This is like traveling from the US to Paris and deciding to visit London or Barcelona or both along the way. You then need to add to or update your plan. Thus, your business plan can address the next stage in your business' life process.

Related: How to Write a Business Plan

12 Reasons Why You Need a Business Plan

A business plan can be thought of as cheap insurance. Just as many people don't buy fire insurance on their homes and rely on luck to protect their investment, many successful business owners don't rely on a written business plan and instead trust their intuition. However, a business plan is more than just insurance. A business plan provides cheap insurance by reflecting your ideas, hunches, instincts, and insights about your business and its future, and testing them before deciding on a course of action. There are so many reasons to write a business plan, and probably one or more of the following apply to your business:

1. Planning helps managers set specific goals.

Good management requires setting specific goals and tracking and follow-up. As your business grows, you need to be better organized, planned and communicate your business priorities to your team and yourself. Having a written plan makes everything clear in your mind before you discuss it with your team.

2. You can share your strategies, priorities, and plans with your spouse or partner.

The people in your personal life intersect with your business life, so shouldn't they know what's going to happen?

3. Use the plan to explain the reasons for the move.

A simple definition of substitution is “whatever you do, don't do something else.” A plan explains why you do what you have decided to do in your business.

4. Having a plan will help you decide whether to rent or buy a new space.

Do your growth projections and plans justify the increased fixed costs of new space?

Related: Do I Need to Write a Business Plan?

5. Explain your strategy for recruiting new talent.

How will these new hires help your business grow and prosper? What exactly will they be doing?

6. Planning helps you decide whether to introduce new assets.

How many new assets do you need, and will you buy or lease them? Use your business plan to determine what will happen over the long term and how long major purchases, such as computer equipment, will last in your plan.

7. Share your plan with your team.

Explain the business objectives of the plan to management, employees, and new hires, and make certain parts of the plan part of new hire training.

8. Share parts of your plan with your new teammates and get them to collaborate.

Use the plan to set targets for new alliances with complementary companies and disclose selected parts of the plan with those companies during alliance negotiations.

9. Use a plan when interacting with professionals.

Share selected parts of your plan with your lawyer, accountant, and consultants, if necessary.

10. When you're ready to sell, include all of the information in your plan.

When it's time to put your business on the market, sell your business so buyers can better understand what your business has, how much it's worth, and why they might want it.

Related: How to Write a Business Plan

11. Planning helps you set a valuation for your business.

Valuation means how much your business is worth, and applies to formal transactions related to divorce, inheritance, estate planning, and tax issues. It usually requires a business plan and an experienced professional. The plan tells the valuation professional what your business does, when you do (or will do) certain things, why you do those things, how much those tasks will cost, and what benefit those tasks will bring.

12. When you need cash, you can use the information in your plan.

Seek investment in your business no matter what stage of growth your business is in. Investors should see your business plan before they decide whether to invest in you. Investors will expect the plan to include all the key points.

Bonus: What's in it for you?

If you or anyone on your team is still skeptical about the benefits of a business plan and how it can benefit you personally, consider some of the benefits that can help you with your day-to-day management.

Your educated guesses will be better. Use your plan to refine your educated guesses about your potential market, sales drivers, lead handling, business processes, and more. Your priorities become clearer. Beyond your strategy, other elements of your business also have priorities: growth, management, financial health, and more. Use your plan to set these foundations and then revise them as your business evolves.

You will understand interdependence. Use your plan to keep track of what you need to do and in what order. For example, if you need to align your product release with your marketing efforts, a business plan can be a great way to keep you organized and on track.

Become better at delegatingYour business plan should clarify who is responsible for what. Every important task should have one person responsible for it.

It makes it easier to manage team members and track results. A plan is a great format for documenting responsibilities and expectations. Then, during team member reviews, you can look at the plan to spot any discrepancies between expectations and results and get back on track.

You can better plan and manage your cash flow. By incorporating a cash flow plan into your overall business plan, you and your leadership team can make better estimates about your revenues, costs, expenses, assets you need to purchase, and liabilities you need to pay.

Related: How to write a business plan that will grab the attention of investors

Business plan risk

Writing a business plan involves risks. Yes, one of the main purposes of a business plan is to avoid risk, but the act of writing a business plan itself carries some risks. These risks include:

Possible leak of confidential materials. While most people who see your plan will respect its confidentiality, a few may (intentionally or accidentally) disclose proprietary information. For this reason, we recommend that you have others sign a non-disclosure agreement (NDA) before sending it to them.

Make yourself confused. You may believe too strongly in many of the projections and projects in your business plan.

Related: The Basics of Writing a Business Plan

Ruin your reputation… or worse. You will do yourself a disservice if you knowingly include overly optimistic projections, exaggerations, or even falsehoods in your plan. Some plans written to raise funds may violate securities laws if they look like a prospectus that has not been approved by regulators.

You're putting too much effort into planning. Then you might not have enough energy or time to actually run your business. Some call this “analysis paralysis” – a syndrome that occurs when you spend too much time planning and not doing anything. For many business people, this is not a problem; they hate planning so much that they can't imagine giving up on actually running their business and just planning.

Business plans can take on a life of their own. You can spend too much time planning a start-up and miss opportunities, or update a plan for an existing business too often and have trouble managing other details. Large businesses have large staffs who can dedicate time to planning year-round. Small business owners need to be more selective.

If you're delaying your launch date to ease your anxiety about starting your business so you can plan more, your planning may be approaching paralysis. If you find yourself postponing important meetings to gather information you need to update your plan, suspect that your plan is becoming overly important.

Related: What to Include in a Business Plan and What Not to Include

Diluting the effectiveness of a planIf you pack your plan with too much detail, you risk overwhelming the reader with irrelevant and confusing details. Your plan should tell a story, not just a pitch – the story of your business.

Therefore, it needs to be as easy to read as possible – that is, low jargon and easy to read in one sitting.

Explain any terms that might be unfamiliar to readers who aren't experts in your industry. And don't make the mistake of trying to overwhelm your readers with your expertise. There's a good chance that the people reading your plan know more than you do. If you come across as a pretentious hypocrite, your plan is sure to be discounted.

It's easy to think that a long, detailed plan is always better than a short, concise one. But the financial people and others you send your plan to are busy people. They don't have time to read through a plan that's several inches thick, and they may be put off by its intimidating appearance. It's better to keep your plan to a few dozen pages and focus only on what's really important.

Accelerate planningWhile some people are obsessed with endless planning, others try to speed up the process. In an attempt to quickly write a plan to show potential investors, you might cut corners or leave out important information. You don't want to spend forever creating a business plan, but business plan software programs make it so easy that you might let the program do too much of the work. Remember, the tool is your guide, not the other way around. Take the time to make sure you:

• Each section explains what you want to communicate.
• Add up all the numbers and it makes sense.
• You can answer any questions your readers might ask.