Why Do You Need a Business Plan?

Person working on business plan

There are many things in life that you can successfully negotiate by "winging it". Indeed, as an entrepreneur, you may often find yourself in situations where improvising on the go – without any prior preparation – can prove itself a useful quality.

Yet while a speech at a friend's wedding, a song at a party, or even a presentation to a potential client can all be navigated in this way, running a successful business does not fall into this category. Even in the case of a lean startup, where actions are driven by product development, it is necessary to plan ahead for the long term.

The Importance of a Business Plan

As an entrepreneur, you will already face near overwhelming odds in the early years of your startup. Blindly forging ahead without a plan will almost inevitably lead to disaster.

Therefore, it is necessary to understand the importance of a business plan, as well as identify how it can make your life easier. Here are seven compelling ways in which it can help.

1. It Helps You Make Better Decisions

Managing a business involves making tough decisions – many of them in high-pressure situations – without any time for contemplation. However, an effective business plan enables you to visualise and plan for at least some of these problematic situations as they arise in your business.

You can anticipate and plan for the various dilemmas that may occur in specific situations (indeed, this is merely responsible risk management), and ponder the implications that each of your responses might have on your business. This can be used to create and implement contingency plans that objectively steer your company in times of crisis.  

To put it bluntly, a well-crafted business plan will help you make better choices at such times. It is a much preferable alternative to making quick and rash decisions based purely on instinct, which can overlook the bigger picture and take you in a direction that it is difficult to recover from.

2. You Can Avoid "Unforced Errors"

In tennis (and, indeed, in other sports), there is a concept known as an "unforced error" – a mistake that is due solely to your own actions, and not because of a brilliant play from your opponent. The same concept is also applicable in a business setting; there are unavoidable mistakes where all you can do is learn and move on. 

However, there are many mistakes that could have been easily avoided with better preparation and foresight. A business plan can go a long way to mitigating such errors, and ensuring that you do not fall into many of the more common operational traps, such as: 

These are all broad mistakes that can lead to the early demise of your enterprise (indeed, when combined together, they account for nearly all small business failures); a business plan ensures that you have a viable strategy in place to minimise the chances of you following suit.

3. It Convinces Investors and Creditors

A business needs a constant inflow of capital to survive and grow, and this will be difficult to achieve through revenue alone (particularly during your company's early years). Therefore, sooner or later, you are going to have to approach private investors or banks for a loan or an investment.

Straight off the bat, it's vital to understand that whether you are pitching to a millionaire investor, a private venture capital firm, or your local bank manager, nobody will give you a penny unless you can produce a business plan. 

By their very nature, investors and creditors are highly risk-averse – they need to know that an organisation is in capable hands before they commit financially. A coherent, well-researched and well-written business plan is key to this, as it assuages doubts, provides a clear roadmap, and convinces your potential backers that you are serious about running your business.

4. It Makes Building Relationships Easier

A business does not exist in isolation; as an entrepreneur, you will need to deal with other organisations routinely. Such collaborators could include vendors that supply your raw materials, retail businesses that stock your product, contractors that handle minor tasks, or any other freelancers and service professionals whose services you require. 

When building such business links, you will often be required to provide detailed answers regarding your business goals and your long-term vision. As with investors, this will help your partners understand your goals, realign their functions and offer better synergy with your business. 

Sharing all or parts of your business plan with collaborators and stakeholders will help speed up this process. It will also give them greater faith in your ability to be a productive partner, especially at the start of a new relationship.

5. It Helps to Grow Your Business

Growing a business is not a haphazard process; at the very top of your management circle, you should be setting specific targets and trying to achieve them within a certain pre-defined timeframe. This isn't a foolproof method – there will inevitably be road bumps and diversions along the way – but, generally, most successful corporations follow this measured approach. For a new company, a business plan contains these initial goals and sets out how you plan to achieve them. 

You can use this as a compass to guide your entire organisation, including your staff, partners, investors, and other stakeholders. Once you reach your initial milestones, you can then revise your plan and add new objectives. The original blueprint will continue to serve a vital function as a foundation on which you build your company's success. 

Of course, you can create a business plan without any milestones or objectives, but it would drastically reduce its effectiveness. Ideally, you should include objectives based on the SMART Goals paradigm: a management acronym that stands for Specific, Measurable, Achievable, Realistic, and Timely goals.

6. It Helps to Keep Your Employees Focused

As touched upon in the previous point, a business plan communicates your business vision: where you plan to take it, and how you plan to do it. To achieve the goals that you have created, you need your employees to be fully aware of – and committed to – these objectives. A business plan will help you to communicate this vision to new and existing employees from the moment they join your team.

Indeed, it can even help during the hiring process. Talented and driven professionals want to know what they are getting into when they join a new company, and a coherent business plan will help you to convince them that your business is headed in a clear and defined direction.

7. It Can Even Help You "Exit" the Business

Not all entrepreneurs stick with the businesses they create in perpetuity, nor is global domination necessary the end goal. In fact, many serial entrepreneurs exit their startups as soon as they reach a certain defined stage of growth. From a personal perspective, having a business plan can help quantify your own personal objectives, and identify when is the right time for you to move on to the next project. 

An ideal business plan will have a section devoted to your exit strategy, whether through an IPO, a management buyout, or a targeted acquisition by an external entity. Your choice of exit strategy will have a huge influence on how you grow and manage your business, and can essentially act as a proposed conclusion to the venture's life cycle – for you, at least.


Need help writing your business plan? Starting Business can provide detailed templates either for general use, or specific to your niche or industry!

Was this article helpful? And what are your thoughts on the viability of business plans in today's lean-oriented commercial environment? Let us know in the comment section below!