written by: Carrieanne Larmore•edited by: Jean Scheid•updated: 2/28/2011
The value of a business plan is not only to lure funding from outside investors, but to also act as a compass for internal decision makers.
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Importance of a Business Plan
The value of a business plan lies in its ability to provide information externally and guide managers internally. Decision-makers can use it as a guide for their actions such as pricing, advertising, product development and purchasing. For instance, if the business plan states the business will have the highest quality products in the industry, then management should not purchase raws materials which are sub-par.
Even though business plans are usually developed during a company's startup phase, it is important to always have one that is updated annually. Business constantly change due to the competitors, economic, and political landscapes. Strategies must be altered and visions may change. Having an updated business plan is valuable because it can be used to attract additional funding, forces management to consider the details and provides decision-makers with direction. While business plans can be made with different purposes in mind, they all should contain the same basic elements.
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Attracting funding is the most common primary objective of constructing a business plan. When the time comes to raise outside capital, most lenders or investors require a business plan. Business plans reassure them that the entrepreneur is aware of and has strategies for potential risks and obstacles. It also shows lenders and investors the entrepreneur has a clear idea of how it will become profitable and what it needs to get there.
It is a common mistake for new entrepreneurs to leave out the potential risks from the plan in fear that it will turn investors away. Including this information provides investors with reassurance that the entrepreneur is aware of potential issues and has a plan in place to tackle them.
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A value of creating a business plan that is often overlooked is its ability of forcing the entrepreneur to think about details. When starting a business it is easy to only look at the grand picture instead of things such as how many employees it will need and the cost of hiring, marketing channels to use, projected advertising costs and when it will break even.
This value is sometimes lost when business owners outsource the creation of business plans to consultants. It is important to work closely with the consultant so that the entrepreneur can get a closer grasp of all decisions that need to be made.
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Business plans act as a compass for management when they must make decisions that will affect the direction of the company. It guides them with details on what the mission and vision of the business is, how it should be positioned against competitors and what should be the focus of its branding and target sales and cost figures. If the startup has multiple managers, the business plan helps keep everyone on the same page along with what is expected from them. Goals can be created based off the information in the business plan, as well as how employees should be rewarded.
The real value of business plans are their usefulness in a variety of internal and external situations. They can be used by management and decision makers to achieve company goals and objectives, as well as for outside investors. Other common scenarios where a business plan proves valuable is when purchasing or renting a location, finding partnerships, and selling a business.