12 Jul Bank on This: You Need A Great Business Plan – Even If You Don’t Need Cash
One of the primary reasons new businesses fail is they simply don’t have enough money. Sure, sometimes they just have a terrible business idea (mittens for cats was not the hole in the market you envisioned). But usually it’s money, and a great business plan – written thoughtfully and early – will reveal potential money problems (and probably the mittens problem too). But people often think of a business plan as a document to provide to a lender or an investor to solicit cash. And that’s certainly true. But even if you don’t need money, you still need a plan.
Here’s why you need a great business plan:
Timing is everything. It’s not too difficult to imagine how new business owners run out of cash – you don’t have enough initial money to last long enough into the business’ development — you’re undercapitalized. This is probably because you underestimated your expenses (or overestimated your sales).
Or, the timing of your expenses and sales are not syncing — you have a cash flow problem. You might be making just enough money, but you’re not getting paid fast enough to cover expenses.
Roads to nowhere. But while these are two of the biggest reasons businesses fail, the path to those failures are various – and a business plan will help reveal possible pitfalls. A strong business plan is one that is robust, thoughtful and thorough. It requires a solid explanation of what the business idea is, why customers would want it, how it will be promoted, and how it will grow to become profitable.
Maybe you have a new idea that no one else has done yet. You need to understand why – are you just brilliant? Or is there a problem that you haven’t seen? On the other hand, if you plan to be the seventh pizza shop in town – how do you feel certain the market is big enough for you to . . . take a slice?
The other guys. You need to understand who your competition is, who your potential customers are and how you will get them to leave the competition and come to you. That will inform things like, how to market to customers – and how expensive that is. But it also will inform how your competitors do business. For example, if you design handbags, you might think yours are cheaper than others, or better quality, or more unique.
But if everyone who sells handbags is used to retail stores paying net 30 (or longer) – so even if individuals like your handbags, the store is your actual customer. And if you won’t accept those terms, their customers will never see your better-cheaper-nicer bags. And if you do accept them, then you have to have enough cash for marketing, in the meantime. You’ll know that even once you have sales, you won’t be able to use that money to cover marketing unless you can push those costs out for 30 days after your sales.
You don’t know what you don’t know. And a great business plan forces you to plan for the unforeseeable. Do you have enough emergency funds? Your marketing plan is solid, your sales are on track, your expenses in check – until your supplier raises prices, your best customer goes out of business, the office burns down (or, you know, hopefully not that, but something). Also there is a cost to outperforming – if you grow really fast you need more inventory, more warehouse space, more employees. It’s a good problem to have. . . until it isn’t.
And, a great business plan is vital if you do need the money.
While many people embrace a very respectable “debt-free only” mentality in their personal lives, there are a lot of reasons to borrow money to start a business. Maybe it’s simply to deal with the cash flow problem above – you pay marketing by using a credit card – and then you have another 30 days before you have to pay that balance. You likely won’t need a business plan to get a credit card – just good credit. But a business loan is the typical way to get more than a few thousand dollars. And they will definitely want to understand how you plan to pay them back. Even if it’s with cat mittens. Hey, if your plan is solid enough — meow.