Why should I bother having a business plan?

By Stuart 12 months agoNo Comments

Pulling together all the information needed to create a business plan is time-consuming, so why bother? After all, you know your business inside out: you know how far you’ve come, where you’re going, and how much money you make. Why jump through hoops just to comply with convention?

That’s a fair question. However, while I’m not one for advocating work for its own sake, I think it’s worth the effort.

First up, it’s only fair to acknowledge that, unlike keeping your accounts up to date and paying your taxes, there’s no legal requirement for any business to have a business plan. However, if you are seeking funding in the form of investment or a loan, you will need one, Think of it as a CV for your business. It sets out your stall in a comprehensive and easily digestible way and allows decisions to be made as to business health and potential.

If the downside of preparing a business plan is the amount of work involved, then the plus side is that it obliges you to take a good hard look at every aspect of your business. A business plan generally covers the business and its products/services; the market and the competition; sales and marketing strategy; business structure and key people; business operations; and financial information. That shines a torch into all those dark corners and makes you think about things you’d perhaps rather ignore and that would otherwise not get done.

You don’t need to prepare a big, fancy document if you don’t want to. A business plan can be as simple as a few sheets of A4 with some essentials on it. At the very least, it’s a good idea to set and monitor progress towards business goals and objectives, and to keep an eye on the financials.

Business goals can be set for the short, medium and/or long term. Without goals a business can drift and take the wrong direction, or else stagnate. Having clear goals and monitoring progress toward their achievement gives focus and purpose to activities, and allows you to recognise when you reach your goal.

Financial statements can be prepared retrospectively or as forecasts. They can give a snapshot of the business at a set point in time, or show how things could look if goals and objectives are met.

Using financial statements, you can conduct ratio analysis to check financial health and performance. Looking at even just a handful of figures can really help you to understand what’s happening.

For example, gearing looks at borrowing versus capital assets, and is an indication of solvency. The current ratio – also known as the working capital ratio – looks at current assets versus current liabilities and is a quick measure of the business’s ability to pay debts on a day-to-day basis. And the quick, or acid test, ratio looks at liquid assets versus current liabilities, and indicates whether liabilities are covered by ‘quick’, in other words ‘easily accessed’, assets.

This is terrific information. Businesses that are profitable and have work lined up have been known to founder due to cash flow problems; keeping an eye on figures such as this can help people avoid disaster. Potential funders or investors can also use the financial statements in your business plan to confirm that the business is viable and worth putting money into.

On balance, then, I would argue that even though it takes time and effort, having a business plan is useful for a business. It can help you see the business more clearly and spot potential problems before they hit.

I’d also argue that a business plan is not a static document. You don’t write it to keep people happy then stick it in a filing cabinet and forget about it. You keep an eye on all the elements that make it up, you keep it updated, you refer to it regularly. Because a business plan is a dynamic business planning tool. It helps you to be in control and it keeps your focus on the things it should be on – that is, those things that make a positive difference to the success of your business.

 

Photo by Giu Vicente on Unsplash

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