When I'm asked to explain why business planning is so important, I like to use a quote from Lewis Carroll. In Alice's Adventures in Wonderland, Alice comes to a fork in the road and asks: "Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," says the Cat.
"I don't much care where–" says Alice.
"Then it doesn't matter which way you go," replies the Cat.
This scene highlights the problems of not having an over-arching goal and plan for your business. Without a plan, a business is essentially rudderless, and day-to-day activities are likely to be haphazard and reactive.
A business plan is not just required to secure funding at the start-up phase; it is a vital aid to help you manage your business more effectively, both strategically and operationally. By committing your thoughts to paper, you can understand your business better and also chart specific courses of action that need to be taken to improve your business.
By understanding your business and the market a little better and planning how best to operate within this environment, you will be well placed to ensure your long-term success.
Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. Prospective lenders will require access to the company's recent financials, along with an up-to-date business plan. The financials helps the investors understand the past, whereas the business plan helps give them a window on the future.
The most crucial component for investors will be clear evidence of the company's future ability to generate sufficient cash flows to meet debt obligations, while enabling the business to operate effectively.
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalised and the company is aligned to focus on key activities. The plan can assign milestones to specific individuals and ultimately help management to monitor progress. Business planning assists with collaboration.
Cash is king, without cash a business cannot operate.
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple—many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due).
Cash flow management then becomes more vital when businesses pursue investment opportunities where there are significant cash out-flows, in advance of the cash in-flows. These opportunities need to be assessed against any seasonal variations in the business and the timing of the flows. This will put a further strain on the company's solvency and hence a well structured business plan will help you manage funding requirements in advance.
At some point, the owners of the firm may decide it is time to exit. Considering the likely exit strategy in advance can help inform and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.
Investment decisions can be taken in the present with one eye on the future via a well-thought-out business plan.
Given that valuing firms is notoriously difficult and subjective, a well-written plan will clearly highlight the opportunity for the incoming investors, the value of it and increase the likelihood of a successful exit by the current owner.
So there you have it. Five excellent reasons to get something down on paper. I will leave you with a favourite, pertinent quote from Warren Buffet:
"Someone's sitting in the shade today, because someone planted a tree a long time ago."
If you'd like help with planning for your business, let's have a chat.