In Alice’s Adventures in Wonderland, Alice reaches a crossroad and asks the cat:
“Can you tell me, please, which way should I go?” “It depends largely on where you want to go,” said the cat. “I do not care much where,” said Alice. “So it does not matter which way you go,” said the cat.
This scene perfectly summarizes the problems in a start-up that does not have an organized business plan. Without a plan, the business is essentially directionless and the business activity seems more random and responsive, in contrast to those businesses that are working to implement a carefully planned business plan. So why is the business plan actually used?
1. Business management, planning and mapping the future
A business plan is not only a tool for obtaining funding but also a tool that will help you to manage your business more effectively. By registering thoughts on paper, you can understand your business better and also formulate a list of actions to be taken to improve your business. A business plan will allow you to plan specific goals and objectives along with the resources required to achieve those goals. By understanding your business and its environment you will be able to formulate an optimal way to operate in it and you will be targeted to ensure a lasting success for your business.
Most businesses deal with investment decisions at some point in their lives. Often, business opportunities cannot be financed by equity or free cash flow, and the business must raise external financing. Although the financing market is relatively competitive, all potential investors or lenders will require access to the company’s statements with the business plan. At checking the reports investors can understand the past, while the business plan helps them to understand the window of opportunity in the future.
When you want to raise investment for your venture, it is important to clearly describe the opportunity, since investors will want to know:
- Why would it be better for them to invest in your business, rather than leaving the money in a bank account or investing in another business?
- What distinguishes you from the other players in the market? Is it the low price, the high quality or is it an innovative and unique product?
- Why would people be willing to give up their money to buy your products or services?
A well written business plan can help you communicate these points to potential investors and help them feel safer. The most essential component for them will be a clear evidence of the company’s future ability to generate cash flow that will enable a return of the investment and an effective business activity.
3. Developing methods of action
A business plan helps the company evaluate future opportunities and commit to a particular action. By formulating the plan on paper, all the less relevant options are left aside and the company focuses on the main activities. The business plan can set milestones and ultimately help the management team tracking the progress.
4. Assistance in cash flow management
Careful management of cash flow is a basic requirement for any company. The reason for this is that many companies fail, not because they are not profitable, but because they are in a state of insolvency. That means that they are unable to pay their debts. Cash flow management is a significant factor when the company has working capital. If you sell on credit so you get the money in the future and you may have to pay some of your expenses before you actually meet the money, a business plan will help you manage your financing requirements efficiently and effectively.
5. Support in Exit strategy
At some point, the company’s owners can decide that it is time to leave. Planning your exit strategy in advance can help guide your decisions in the present.
Most common exit strategies:
- Initial public offering (IPO)
- Merger or acquisition
- Acquiring control by the management of the company (MBO – Management Buyout)
- Generational successions
It is possible to make investment decisions in the present while looking into the future through a detailed business plan. For example, the most attractive exit route is usually selling the company to competition. Current decisions can focus on activities that increase the attractiveness of the company to the competitors. Given that the company’s valuation is difficult and subjective, a well written plan can highlight the opportunity for incoming investors and increase the likelihood of a successful exit by the current owner.