I know what I’m doing; why do I need a business plan?

Q & A by C.J. HaydenWhile it’s true that many business owners never take time to write a business plan, it’s also a fact that two-thirds of all new businesses fail in the first five years. The majority of failed businesses never had a written plan.

A business plan is a detailed document that analyzes, describes, and forecasts your business activities. In order to get financing, you need a formal plan that includes market studies, personal financial information, and supporting evidence. For your own use, you need a plan that captures your ideas, formalizes your intentions, and projects your sales and expenses.

Writing a business plan will help your business succeed because putting your ideas in writing makes you think them through. With detailed profit-and-loss projections, you can decide whether to go ahead with a particular line of business before you get started, and see in advance how the profitability of your concept can be improved.

You need to clearly define who your intended market is, what you intend to sell them, why they will buy it, and how you will reach them. This definition will enable you to price your product or service appropriately, and then to estimate your total sales. After deducting how much each sale will cost you in terms of materials, inventory, packaging, or labor, you must subtract your estimated expenses for marketing and overhead. It’s important to project each category of expense in detail to get accurate estimates. The remainder is what you will have left to live on, pay taxes, cover your debts, and re-invest in your business.

By doing these projections ahead of time, you can avoid many common mistakes. These might include pricing your products or services too low, forgetting that costs rise when sales do, underestimating your marketing or overhead expenses, or forgetting you need to earn enough to pay for time off. You will also be able to tell the level of sales you must have in order to be profitable, and evaluate whether you can actually produce that much in the time you have available.

It’s a rare business owner who doesn’t make useful discoveries about how to run a more profitable business by taking the time to make a written plan. A plan that exists only in your head can’t provide the level of detail you need to make informed decisions. A solid, written plan can provide essential guidance not only when your business first gets started, but also when you hit the inevitable trouble spots along the way.

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