Why do we need a business plan?
Your Business Plan: The Roadmap That Guides You to Success
Your business plan acts as a reflection of you, showing that you have really thought things through. It requires advance preparation, delegation, refinement, and, most importantly, a disciplined approach. Writing a business plan forces you into disciplined thinking if you do an intellectually honest job. An idea may sound great in your mind, but when you put down the details and numbers, it may fall apart.
Many entrepreneurs begin business planning by incorrectly estimating the length of time and effort it takes to prepare an effective business plan. It cannot be completed in one attempt. A business plan is a living document, and business planning is a process that never ends. The plan changes, especially with most high-tech ventures, where it may change in the early stages on a weekly if not a daily basis. These are not huge changes but iterations, and the business plan becomes “someplace” where modifications are noted as the venture takes shape and more information is collected. The overall business planning effort is based on the degree of uncertainty, the degree of complexity, and the potential threat from competitors.
Most people hear “business plan” and think only “start-ups.” Yet this is not always true because ongoing companies create business plans, project plans, new product plans, and plans for acquiring and integrating other ventures. General Dwight D. Eisenhower once said, “Plans are nothing. Planning is everything.” Planning is a great exercise to help you think through all the business aspects and forces you to know your business.
Our discussion is not about whether you should plan. Our discussion is about planning effectively. As Drucker says, “Entrepreneurship is risky mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. They violate elementary and well-known rules.” Entrepreneurs, Drucker argues, need a systematic approach for putting all the pieces of the puzzle together.
Business planning helps entrepreneurs work smarter, stay alert for roadblocks, test new ideas, stay motivated, help align expectations with stakeholders and investors, and even reduce stress.
Ted Clark, the director of Northeastern University’s business planning contest, comments on the importance of business planning, “If you’re starting a company, you must have a business plan. If nothing else, it’s an educational exercise to learn what you’ll need to develop your business.”
As Eugene Kleiner says, “A plan shows how you’ll run your business. Without a plan, you don’t know where you’re going, and you can’t measure your progress.” So business planning, as it turns out, is really no more than another good management practice.
Critical Elements of a Business Plan
The business plan is perhaps the most important written document an entrepreneur can ever create. It describes all critical internal and external elements and strategies for guiding the direction of the venture’s first several years as well as giving potential investors an idea of the venture’s structure, objectives, and future plans. It communicates important entrepreneurial management practices, such as how the venture will mitigate risk, and how the venture will manage uncertainty.
Most importantly, new business venturing is now about focusing on creating sustainable value. But which elements of your venture are capable of creating value? And which elements, if not properly managed, are capable of destroying value?
Business planning is the process of uncovering and identifying what creates and drives value in your business; the business plan is the document that communicates your Value Drivers.
The Ten Value Drivers we need to see in your business plan are listed here:
1. Solid Opportunity and Industry Analysis
2. Business Strategy and Sustainable Competitive Advantage
3. Proven Venture Team and Sound Organization
4. Control of Critical Capital Resources
5. Strategy for Market Entry and Sales Traction with Customers
6. Strategy for Marketing and Sales
7. Strategy for Managing Rapid Growth
8. Strategy for Managing a Networked Enterprise
9. Sound Financing Strategy
10. Viable Exit Strategy
For an element to create value it has to affect one of four inputs into the total business venturing process. It has to:
– Increase the cash flows generating from existing activities
– Increase the expected growth rate in earnings
– Extend the period for which the venture can sustain above-normal growth based on its competitive advantage
– Curb the aggressiveness of its working capital policies, meaning a reduction for the cost of capital and/or a reduction of burn rate
Internal Uses of a Business Plan
Business planning helps you become the “value manager.” A value manager focuses on “long-run cash flow returns” while having the perspective of an “outsider’s view of the business” and “a willingness to act on opportunities to create incremental value.” The first opportunity to create incremental value is through selling. Entrepreneurship is about selling your ideas, your mind, your labor, your skills, and your teams. Your business plan will help you develop immediate “sales momentum,” or what we call traction.
Most entrepreneurs are first “technologists,” engineers, or are too deeply involved with their products and need help in selling and communicating the benefits of their products, their ideas, and their ventures.
The business plan helps in focusing and communicating what the product does, who are the key customers, and what the milestones are and what are the timelines.
Other internal uses of a business plan include:
– helping you set objectives
– managing risk and uncertainty
– establishing performance metrics
– motivating and focusing venture team
– attracting key employees
– analyzing capital budgeting decisions
– facilitating new product development projects
– leading internal projects
– integrating new acquisitions
– facilitating and leading restructuring, turnarounds, and restarts
So once a formal business plan is prepared, sections can be pulled out and updated or shared as needed.
External Uses: The Venture Drill
It is very hard to have a dialog about financing without a business plan. As Kleiner states, “In today’s business environment, a business plan is an entrepreneurs’ most crucial business document. No company can expect to articulate its goals or to secure financing without a well-conceived and well-presented business plan. Without a convincing business plan, no one will seriously consider your business idea.” Over the last couple of years business plans have taken many shapes and forms. However, they are still the preferred mode of communication between entrepreneurs and potential investors.
Andreas Stavropoulos, a venture capital partner with Redwood City, California-based Draper Fisher Jurvetson, says they receive some 10,000 to 12,000 business plans from entrepreneurs each year. They might meet with 250 to 300 entrepreneurs, and make a deal with twelve to fifteen of them. He says, “You need more than a great idea. You need a great business plan.” Mark Gorenberg, a partner at San Francisco-based Hummer Winblad Venture Partners, says that a sound business plan will help you convince others that you are a less of a risk than the last or the next business plan.
Against the wishes and hopes of many entrepreneurs, there’s no such thing as the “immaculate venture” where the stages in the entrepreneurial life cycle are skipped over from idea to harvest. The venture drill is the formal process that all entrepreneurs must address when raising money from outside investors.
The three steps to the venture drill are packaging, placing, and presenting.
– Packaging is researching and writing an effective business plan.
– Placing is skillfully introducing the opportunity before the best investors.
– Presenting is communicating and making the deal in a formal meeting.
Entrepreneurs tell us that starting a company, raising money, and making deals is a constant battle and business planning helps them sort issues out. Other external uses of a business plan include communication memorandum with existing investors, arrange strategic alliances, obtain large contracts with marquee customers, facilitate mergers and acquisitions, and secure key executives.