The importance of a business plan: Why all startups should develop one

  • by

It is easy to discount the importance of a business plan. As a startup founder, you likely have lots of pressing activities, and since there are likely many uncertainties about your business, it is possible to fall into the trap of continually delaying documenting your firm and its approach.

Forces systematic consideration of key business actives

Possibly the main reason to develop a business plan is to systematically consider key components of the business, and how you will actually launch and grow the firm.

Oftentimes a startup is focused on a key innovation or a new market that you have identified. There may be a key, high-level ambition for the firm that the founders are excited about achieving. Identifying new opportunities is an important part of launching a firm, but it is not enough – there are a lot more details that you will need to determine across the firm’s activities, beyond the core essence of the firm’s strategy.

Considering the firm’s activities is critical to actually implementing the firm’s strategy. From examining the firm’s relationships with suppliers and customers to determining a manufacturing setup, distribution channels, and marketing approach, a business plan is important to give the necessary attention to how you will implement each different activity.

Allows evaluation of the business model and underlying economics

Beyond determining key decisions, developing a business plan also allows you to ‘test out’ an idea without significant commitments of time or resources. You may discover, having thought through the business opportunity in more depth, that the economics simply do not add up. It may be, for example, that at your envisioned production volumes, the numbers don’t add up – that your costs exceed revenues, and that it would be very hard to make money in the industry that you are attempting to enter.

Success is not a given for small firms – many startups fail. While it is impossible to predict the success of a startup, not being able to make the numbers work on paper is a good early warning sign of future problems for the firm. It is a lot better to learn early that a company is unlikely to be a success, than after you have invested significant time and money, and being forced to detail the business model can sometimes be a necessary wake-up-call on the fundamental economics.

Facilitates improvements to key business decisions

Having a plan on paper can also make it easier to identify superior approaches. When all parts of a firm’s business approach are in flux, it can be very difficult to get a handle and improve any particular part. Starting to determine, and at least pencil down on paper, the approach that the firm will take across key business decisions can allow improvements to be identified in other parts of the firm’s approach.

Rather than locking the firm into a specific course of action, a business plan can facilitate change. By getting a handle on the approach the firm will take, it becomes easier to work on improving specific components of the firm’s approach. For example, it becomes easier to evaluate your sales approach if you have a greater understanding of how you will be manufacturing and distributing your item.

Helps you gain the support of others

Having a business plan can also help you gain necessary support from others – and especially financial resources. Having a developed business plan helps you illustrate that you have thought through your business and come up with, at least on paper, a possible way of making money and competing. While startups can’t show prior success, having everything planned out is the next best thing – it can give some confidence to outsiders to commit resources to your company.

Carefully considering the business makes it a lot easier to talk about the business with others. While a 60-second elevator pitch is important in establishing initial contacts, ultimately individuals that you work with – from suppliers and investors to customers are potential employees who are going to have their own questions before they are willing to commit to the company. Systematically thinking through the different components allows you to give confident answers – along with justifications for why you are intending to pursue certain activities – helping to win the trust of important stakeholders.

Helps with implementation

The final reason why developing a business plan is so important is that it can help with implementation. Having thought through all of the key activities of the firm in advance, you are much better placed to be able to implement your strategy. The advanced attention helps ensure that important activities are not forgotten, and potential pit-falls identified in advance, and side-stepped prior to launch.

Final thoughts

There are interesting analogies between developing a business plan and a writer writing a novel. In your head, everything can seem clear, however, it is not until you get pen to paper that you begin to see areas that need tweaking and developing – parts that seemed to make sense, but when you share with others don’t seem to work as well. Just like writing a story, it is easy to push off developing a business plan – to delay the process in the hope that everything will become clearer. Don’t let the pursuit of clarity prevent you from developing your business plan. You will never get full clarity on your approach – and maybe especially so if you continually delay actually working on it.

Similarly, don’t look to ‘outsource’ wiring your business plan to someone else – it is as much about the learnings that you gain during the creation of the business plan, rather than the final document itself, and thus it is important that you go through the development process yourself

Related Articles

Why so many startups fail

This article explores some of the key reasons why startups fail, with tips to help you avoid some common pitfalls in your own business

The importance of an elevator pitch

The elevator pitch – a description of the essence of your business’s strategy that you are able to share within about 60 seconds, or the time to go up an elevator – is critical for startups to develop. This article explains the benefits of having an elevator pitch strategy, beyond securing financing.

Related topics: