Creating an effective business plan can be an intimidating task for anyone who’s never owned a business before. While there are countless opinions regarding the importance of a business plan when it comes to financing it is in your best interest to have one.
Many banks and lenders will expect a business plan from a company that is applying for a loan or line of credit. If you plan on applying for an SBA loan then you will certainly need to have one.
For an established business it demonstrates that careful consideration has been given to the business's development, and for a startup it shows that the entrepreneur has done his or her homework.
A formal business plan is just as important for an established business, irrespective of its size, as it is for a startup. It serves four critical functions:
1. Helps management or an entrepreneur to clarify, focus and research their company or project development and prospects.
2. Provides a considered and logical framework which a business can develop and pursue business strategies over the next three to five years.
3. Serves as a basis for discussion with third parties such as shareholders, agencies, banks, investors, etc.
4. Offers a benchmark against which actual performance can be measured and reviewed.
Just as no two businesses are alike, so it is with business plans. As some issues in a plan will be more relevant to some businesses than to others, it is important to tailor your plan's contents to suit individual circumstances.
Nonetheless, most plans follow a well-tried and tested structure and general advice on preparing a plan is universally applicable.
A business plan should be a realistic view of the expectations and long-term objectives for an established business or new venture. It provides the framework within which it must operate and, ultimately, succeed or fail.
For management or entrepreneurs seeking external support, the plan is the most important sales document that you are ever likely to produce as it could be the key to raising financing.
Preparation of a comprehensive plan will not guarantee success in raising funds or mobilizing support, but lack of a sound plan will, almost certainly, ensure failure.
If you are writing a business plan for your bank, your bank manager will want to see that your ideas are well thought out, but the most important aspect to him or her will be your financials.
Are your projections realistic? And will the cash flow of the business be enough to ensure that you can make the monthly payments for the loan that you have requested? If your business is making $1,000 a month and your payments are $1,200 a month, the bank is likely to reject your application.
When considering an investment opportunity, most venture capitalists will look at the obvious trends and market niches. The most important factor in a decision to invest in a company is the quality of the people.
In real estate, the three biggest factors are “location, location and location.” The venture capital factors are “people, people and people.” VCs will ask, how experienced are the people that are going to run this business? Do they have knowledge of the industry? Have they started successful businesses in the past?
Make sure that your plan is clear, focused and realistic. Then show them that you have the tools, talent and team to make it happen.