It can be a rather disrupting thought, starting your own business… It’s tantalizing, smelling of power, glowing with esteemed status and good fortune. But this starting your own business thing is, sadly, mostly scary, and intimidating at best. It is something you can’t conquer without a plan. Hence, we suggest three good reasons to have a business plan before starting your business…
In spite of having access to more knowledge than ever before, you’ll need a well prepared and structured business plan to help give you the first steps on your new journey…
The three good reasons to have a business plan are as follow:
To focus on your business; To secure funding, and To get people to invest in your business.
Reason 1: To focus on your business
There are many distractions when you start your business. Indeed, if you fail to focus on your business during its start-up, your business won’t last for long.
You should look out for the following distractions when starting your business:
• Unwanted advice or critique from friends and family. Although friends and family usually don’t have bad intentions, it can sometimes be overwhelming to consider their personal opinions about how you should start or run your business.
• It’s Busy environment. Everything happens at once when you start your business. After all, there’s a lot to do and many to do it, suggests Anna Johansson in Entrepreneur. It can quickly evolve into an uncontrollable chaos situation, which may result in the would-be business owner to run away…
• You worry about issues before they arrive. One of the good characteristics of an entrepreneur is to be forward thinking. As a result, they have the ability to predict the difficulties and obstacles that their start-up will have to overcome.
However, they can be so distracted by something that may become an issue in a year or two that they are unable to focus enough on the things that actually mattered in the present (Peter Daisyme, StartupGrind)
How can having a business plan before starting your business helps you to focus on the task ahead?
The abovementioned distractions are only a few of many more that can put your business start-up in disarray. Here’s how a business plan may help you to focus:
• Answering interfering friends and family. By drafting your business plan before starting your business, you’ll have the means to explain your business idea and the way forward to those that you love and care for. Indeed, once they learn from your business plan what your prospect business is really about, they will most probably step back or give your positive support.
• It prevents absolute chaos when starting. A business plan helps you to keep tract of the right things and also which things are most important. Even more, the plan can guide you to spend your time and other resources effectively. In fact, should you start to panic or get overwhelmed by the situation, your business plan will serve as your “GPS” to get things back on tract.
• It gives you a peek into the future. Nobody knows what’s going to happen in the future. However, if you include scenario planning in your business plan, then most of the obvious issues that may affect your business in future, has already been thought about. Thus leaving an unhindered entrepreneur to only focus on what matters now.
The second of the good reasons to have a business plan before starting your business, is to secure funding.
Reason 2: To secure funding
Just this morning I’d visited the SMME BUSINESS HUB, a public Facebook group whose members are small business owners or people who are interested in business. I’ll give you one guess what the first comment was about this morning (from Shipo): “Greetings future Entrepreneurs, is it possible to get a start-up business loan from the bank!?”
In fact, getting funds to start or grow their businesses has been identified as one of the biggest challenges for entrepreneurs and business owners. Indeed, despite the dependence of SMEs on debt finance, paradoxically access to debt finance is very limited for new SMEs, especially in developing countries 1.
The issue of SMEs getting funded by commercial banks has featured already in this blog – read: How easy is it for SMEs to get Business Loans from Commercial Banks?
So, will a business plan convince a commercial bank to lend you money for your business?
A business plan on its own is probably not enough to get banks to lend your money. However, if you don’t give them a business plan, they won’t even look at your application. Therefore, a business plan, amongst other things, is needed to secure a loan from commercial banks.
And what are the ‘other things’ needed by commercial banks?
• A banker need to know about your collateral. They want to know how you’re going to repay the loan.
• Bankers love to run ratio analyses. Therefore, they look at changes in various ratios over time.
• Also, bankers want to see a full personal financial statement. For example, what assets do you own and what are your liabilities?
Lastly, you need a business plan to attract and convince venture capitalist to invest in your business…
Reason 3: To attract investors
Photo by iStock
If you’ve got an extraordinary business idea, or if you’d recognized a previously unknown market need, then you can approach venture capitalists to invest in your business. For that privilege, the investors usually demand an equity share in your business.
Getting venture capitalists to invest in your business idea is no easy task. In fact, only a small fraction of new business ideas gets the attention of the investors.
A venture capitalist and a bank manager have a different perspective if they read the same business plan of a start-up business. Whereas a bank manager wants guarantees that you’ll pay its money back; the venture capitalist wants the get involve in your business and make heaps of money. After all, the one is a bureaucrat and the other one is a capitalist – two different kinds of beasts indeed…
We are hearing almost every day about the ‘new normal’. My opinion is that their will be plenty of ‘new’ in the future, but with no ‘normal’ anymore. In fact, I predict that the life time of a business model will be measured in months, or even shorter.
So, is a business plan still of value when the business environments are in constant disruption? Yes. I would suggest even more than ever. However, it should be a dynamic business plan driven by data mining and big data.
Therefore, I add a fourth good reason to have a good business plan before starting your business: To seamlessly join the new economy in order to conquer the challenges of the 4th industrial revolution…
All four reasons to have a business plan before starting your business is valid.
1 Fatoki, O.O. and Smit, A.V.A. 2011. Constraints to credit access by new SMEs in South Africa: A supply-side analysis, African Journal of Business Management, 5(4):1413-1425.