Business Plan Background
Jane and John had a good idea, a good sense of their market, and a good location. They were great salespeople, and yet they were not making a profit. The reason was that they did not plan their business all the way through. When you are serious about your business or when a lot of money of your own or someone else's is at stake, creating a business plan is perhaps the most critical activity you can undertake. The plan is important, but what is even more important is the understanding you get from the planning process. The following pages will help you understand the thinking behind business plans and how to make and present your own. A business plan is a document designed to detail the major characteristics of a firm--its product or service, its industry, its market, its manner of operating (production, marketing, management), and its financial outcomes with an emphasis on the firm's present and future. There are two circumstances under which creating a business plan is absolutely necessary. One is when outsiders expect it. This is called external legitimacy. Creating a business plan is the acknowledged best way to build external legitimacy for your firm. When you are seeking outside support--whether financial or expert--you do a business plan to signal your professionalism and how serious you are about the business. Investors, whether they are venture capitalists, informal investors (called angels), bankers, or your two great aunts, are going to expect to see a business plan before considering investing in your business. In addition, many small business consultants and government agencies want to see your business plan in order to understand your operations, goals, and level of understanding. If you are pursuing a partnership or joint venture with a larger firm, people there will expect to see a business plan before they even consider partnering. In these situations, a plan is the only way you are going to get the attention of outsiders. The kinds of benefits these different groups look for in a plan are given in Table l. The other circumstance under which a business plan is needed is for internal understanding. This is when you want to get all the aspects of the business clear in your mind and the minds of others in the business, such as your partners or your key employees. When you want everyone to understand the business in the same way, a business plan can make a tremendous difference.
For example, a restaurant has long had an extensive business plan. It talks about the history and vision of the restaurant and includes a detailed operational plan covering everything from table layouts to techniques for minimizing waste. For new hires, the plan offers insight and specific information on the way of doing things at this restaurant. Business plans can also be used as a way of establishing a baseline against which a firm can measure its performance. Is a business plan absolutely essential? If you are seeking a banker, investor, or partner, yes. Generally if you need outside support to get a business going, those you are seeking support from will want to see a business plan-and you will want to make sure the plan addresses their concerns. Also, if you are trying to start or run your business in a professional or ambitious way, a business plan is vitally important. It is true that some of the most famous entrepreneurial firms--Apple, Microsoft, Dell, Holiday Inns--started without business plans. On the other hand, there are a lot more famous firms that started from the business plan-Amazon, eBay, Mrs. Fields, Red Hat, Xerox, and Federal Express to name a few.3 When Inc. magazine polled 500 owners of high-performing small businesses, 54 percent had a plan and 41 percent did not.4 Typically, the higher performing firms in any industry (measured in profits) tend to be those who engage in planning.5 It is important to know that research suggests that firms without a business plan are more...
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