I read an article by C. Norman Beckert, district director for SCORE, in the Idaho Statesman’s business magazine Business Insider (I’d link to it, but it’s subscription only), in which he discusses whether or not you need a formal business plan for your business idea.
His answer was spot-on: It depends.
He feels that unless you are applying for financing you only need to draft as much of a plan as necessary to keep you on track and prove you’ve done some basic homework. The two most essential pieces that you should address no matter what are your 12-month financial projections, and how you plan to attract customers.
The financial projections (start-up cost plus one- year operating costs vs. monthly sales) are important as a reality check. While it’s quite easy to lie to yourself and throw some numbers together that look good, those who take the time to put together the best projections they can will find it helps them a) have goals to reach for and measure against, b) helps them identify potential pitfalls, and c) make sure they have enough capital to reach the profitability stage.
Taking time to identify your core customers, where they are, and how to attract them is also important. This bit of knowledge has helped us, if nothing else, avoid wasting advertising dollars with every account manager that walked in our door claiming to have the key to reaching our customers. A simple look at their demographics and market share excluded most of them right away, because we knew who we were targeting–and that they didn’t reach those people. The bottom line is that if you don’t know who you want to reach you’ll have no idea how to reach them. Hoping people find you is no way to run a business.
But having much more than that can actually get in the way, according to Beckert: “Taking the time to develop a formal plan could result in the opportunity passing you by, while a plan as simple as a ‘to-do’ list may be adequate. If your forecasted income exceeds forecasted expenses, it may be best just to plunge in and start the business.”
In my case we at least discussed amongst the partners all the points involved in a business plan, but wrote very little of it down formally. We have considered applying for financing, and if we do it won’t be very hard to put together a plan. But just the exercise of putting together our projections has proven invaluable. And gratifying, considering that we have consistently beaten our projections, and will achieve profitability two months early at our current rate.
Not to brag or anything.