“It’s for raising capital,” says the entrepreneur.

“It’s for judging the investment potential of start-ups,” says the angel investor.

“I need it to decide on a company’s creditworthiness,” says the banker.

All wrong.

A Plan Is for Planning
The above are important uses of business plans, but they aren’t what the business plan is for.  The business plan is for business planning. But isn’t that obvious?  Not to everyone.  You’ll be shocked to hear this, but many business owners just use their business plan for getting started and then forget about it.  Imagine that.

If you’re starting a new business, you need to go through the rigor of writing the business plan, all the while thinking about the many important aspects of the enterprise and working through the problems that you encounter.  You need to do this yourself.

Let’s consider a few elements of the business plan.

Your Market
Do you understand your market?  Do you have experience in the market or are you looking at it from the outside?  What about competition?  Will your product or service meet an existing need?  Why is your product or service better than what’s already out there?  What about pricing?  Can you realistically predict sales results? Do you truly have a feeling for your market?

People
Your new company may need only a few people at first, but you’ll still have to consider the costs of employment.  What kind of people will you need?  What are the prevailing levels of pay?  Profit sharing?  What about health insurance?  What laws and regulations need to be followed?  Will everybody work full time?  What about unions?

Finance
How much capital will you need to launch your new business and sustain it for, say, two years, until you can achieve a toehold in your industry?  Will you need bank loans?  You’ll need to draw up a starting balance sheet and forecast operating results going out for two or three years.  The forecast will have to be based on realistic assumptions.  It’ll be worth your while to build a detailed financial model that takes a myriad of items into account: salaries, wages, capital expenditures, taxation, and much more.  The model should take virtually everything into account that bears on the performance of the business.  If you’re not a spreadsheet whiz, hire an expert to build the financial model.  Work closely with your expert on this.  Don’t just turn it over for someone else to do.

Revise, Revise, Revise
Say your business plan is complete.  You’ve launched the business and used the plan to bring in an investor to provide much-needed capital.  Your banker used the plan in getting approval for your line of credit.  Now, what do you do with the business plan?  File it away?  The astute business owner will make the business plan a part of his ongoing planning process.  Quarterly and annual budget reviews should tie into the business plan.  In the process, it should be updated on a continuing basis as the company matures.  If you keep revising the business plan as the company moves forward, the plan becomes more and more of a valuable tool.

This conclusion was based on a study of the business plans of more than 700 dot-com companies from the late-1990s to early-2000s boom era.  The study, “Form or Substance?  The Role of Business Plans in Venture Capital Decision Making,” appears in the May 2009 issue of Strategic Management Journal.

A noted business planning expert, author, and angel investor disagrees.  Tim Berry, president of Palo Alto Software, Inc. (Business Plan Pro) offers this response:

“Isn’t this about as dumb as saying a screenplay doesn’t matter because the audience won’t read it?”

Berry goes on to say that venture capitalists may not read the plans – “but the plan is for you, the startup wanna-be, to know what you’re trying to do, and how much money you need, and why, and what you’re going to spend it on.  You may only show the VCs the presentation, but if you don’t have a plan behind it, with your numbers straight, then they’ll know it.”

Read it all on Berry’s website.

I haven’t read the study, but I’ll take a wild guess and say that most investors have regained their good sense by now, a decade after the dot-com boom.  Nowadays investors need to know that the entrepreneur has worked through the rigor of a serious business plan, is fully aware of the problems ahead, and has well-thought-out solutions.

I do agree that would-be business owners shouldn’t be so consumed with writing business plans that they neglect their companies.  But they can avoid being overwhelmed by seeking the assistance of qualified business consultants / writers to take care of producing solid business plans; leave the time-consuming work to professionals.

Any comments?  Do business plans still matter?

• It’s not an overture or a prelude to the main body of the business plan – something that introduces the theme of the plan and sets the mood with sweeping imagery and generalities about “opportunity,” “innovation,” and “meeting needs”.
• It’s not only for summaries about the company’s executives.
• It’s not just an introduction to the business plan.

Now, what the executive summary is:

• It’s your business plan in miniature, an overview.
• It must be clear, logical, interesting, and exciting.
• It’s your best sales pitch, on paper.

What’s the purpose of the executive summary?  The main purpose is to spark the reader’s interest.  The first reader of your plan will probably be the decision-maker at a venture capital firm, an angel investor, or your banker.  You have this person’s attention for the time it takes to read the 1 to 2 pages of your executive summary.  In that brief period you must deliver a longer version of your best “elevator pitch”.  Your reader will judge the quality of your idea and your team.  If he or she is favorably impressed, your business plan will be referred to staff analysts for evaluation.  If not, it goes to the trash.

Contents of the executive summary:

• Business description.  What form it will take (corporation, partnership, or proprietorship) and whether it will manufacture, market, or provide a service.  How will your business operate?  State your goals and your strategy for achieving them.  Include your mission statement.
• Products or Services.  What are your products or services?  Give a clear, concise description.  What developmental stage are you in?  What is your competitive advantage?
• Market.  What’s the demand for your product or service?  What’s your company’s market potential?  What’s your customer base?  Comment on your competition.
• Management.  List the key members of your management team.  Include biographical sketches and show why they are qualified to lead your company to success.
• Finance.  Include basic financial information and funding requirements.  Show how funds will be used.  Summarize projected revenues and market share.

Tips:

• Write your executive summary after you complete the formal business plan.
• Stick to the essential information.  Be concise.  There’s room in the rest of the business plan for elaboration.
• Use strong, positive language – but watch out for hype.  If you come on too strong, you might turn off your reader.
• Close with a strong statement of why your company will be a winner.

R&D had left them broke.  They needed to move fast.

Senior officers focused all their attention on attracting private investors who would share their vision of the company.  A group of investors entered the scene.  They liked what they saw.  They had the money to invest and were ready to proceed.  They asked to see the business plan.

The most recent plan had been written several years before.  Some market research had been done, but management still had decisions to make and essential company information wasn’t available.

• How much new funding was needed?  Over what period of time?  How much control would the new investors have?  How would the new capital be deployed?
• Financial information wasn’t current and there were no financial projections.  Tax returns weren’t up to date.  The company had never hired a chief financial officer.
• The company wanted to sell products into several industry segments, but there was no marketing plan.  No senior officer was in charge of marketing.  There were only conflicting marketing ideas under discussion.

The company attempted to update the old business plan, but – lacking vital information – they ended up with something that discussed the company’s history, described the products, and speculated on their potential, but fell short of telling the investors what they needed to know.

Because management hadn’t planned their business plan, they weren’t ready when the time came.  The investors went away.

Think of your mini business plan as an elevator pitch on paper.  Think highlights.

The plan can be 1 to 10 pages.

Being as concise as possible, include the most important aspects of your business in these sections:

• Mission statement
• Business description
• Market / industry overview
• Marketing plan
• Financial projection charts (balance sheet, cash flow statement, and income statement) covering 3 years.  List main categories only.  Follow with your most important assumptions.
• Biographical sketches of your key management / technical team

If you feel compelled to use images, be careful to use only those that make a powerful contribution to the plan.

A mini business plan is like a short story – there’s no room for fluff.  Every word must count.  Avoid jargon and buzzwords.  Rewrite, rewrite, rewrite – until you have a crisp, clear elevator pitch that gets you to the next stage in building your company.

What are the uses for a business plan?

1.  Raising capital.  A good business plan can convince investors to put up the money to help start a new venture or to move a business to the next level.

2.  Financing.  Give your loan application a boost.  Attach an updated copy of your business plan.

3.  Attracting executive talent.  Your new marketing VP will understand the company much faster with an up-to-date business plan at hand.

4.  Alliances.  Would-be strategic partners can learn about your company by studying your plan.

5.  Departmental uses.  Sections of your business plan can be the starting point for a detailed marketing plan or a human resources policy.

6.  Keeping current.  Update your business plan according to the calendar or to take account of changes in your company or industry.

7.  Staying on track.  Are your current activities or near-term goals in line with your original strategy?

8.  Long-term planning.  Use your business plan as a platform for testing future scenarios.

If you have more uses for a business plan, please leave a comment.