Why Your Small Business Needs a Plan

Do you think you need a formal business plan to start or grow your business? The answer is that it depends. The usefulness and necessity of writing a complex and formal business plan is a hotly debated topic among entrepreneurs.

However, every business does need a plan of some sort. Even if that plan is two sentences on the back of a cocktail napkin or totally within your own mind. You need something if you want to achieve and maintain success in business.

Plans are the Roadmap to Achieve Goals

The purpose behind a plan in business is to outline how you will achieve a goal. Your goal may be as simple as starting a clothing boutique that becomes profitable within five years. Or it can be complex and include key performance indicators (KPIs) for revenue, growth rates, and profit margin. You really can’t formulate a plan of any sort until you figure out the goals of your small business.

Clear Goals Beget Useful Plans

Keep in mind that a plan gets you to a goal in the same way that a path gets you to a destination. The more precise and accurate description you have for your destination, the easier it is to find the best path to reach the desired destination. This is as true in business as it is in everyday life.

Imagine trying to pick the best path to find food. There are paths that lead to your kitchen, to grocery stores, to restaurants, or even to a garden or hunting grounds. Those are all very different, yet valid paths to acquire food. If you’re on the verge of starvation, you’d want the path that leads to the strawberry plant a few feet away from you. In that case, it’s important to define your goal as finding food as quickly as possible. Conversely, if you’re taking a sushi-lover who is allergic to strawberries on a first date, you’d be in for a bad night if you take the same path to that strawberry plant. Here you’d want to define your goal as finding a local sushi restaurant that is great for a first date.

Powerful Plans Require Specific and Actionable Business Goals

Once you have a clear well-defined business goal in mind, creating a viable plan becomes a much simpler task. Like with our food example, if you have no goal, or a vague goal, you will struggle to create a useful plan.

If two lawyers just have a goal to simply create a successful law firm, how do they even get started on a plan? They may get lucky and stumble upon a specialty and land enough clients by accident to stay in business. A better goal would be to create a personal injury law firm that within three years can support two attorneys each making $100,000 per year. As part of their goal, they should research the average settlement size in their target area. If they focus on car accidents, according to Nolo a successful claim may yield around a $15,000 settlement. Multiply that by the contingency fee of 33⅓%, and an average client will generate $5,000 in revenue. The profit margin of a law firm might be in the neighborhood of 40%, which nets the attorneys $2,000 per client. This means our hypothetical duo of attorneys should ideally set their goal at finding 100 clients per year by the end of their third year in business.

With such a specific goal, the lawyers can really create a powerful and actionable plan. And it doesn’t even have to be a 40-page business plan. If both attorneys work 260 days a year, they’d each need to find roughly one new client each week. If you’re an outgoing person and want a simple plan, you could just plan on having 10 meaningful conversations via networking events or just reminding your network of family, friends, and colleagues that you can handle injury claims for anyone they know. If you’re more digitally inclined, maybe your plan involves writing two relevant blog posts per week for your website and engaging with people on social media in your area.

Plans Should Change as Your Business Changes

Keep in mind that the goal and the plan can and should evolve as your business grows. It’s always important to remember that the plan is just the path to keep you on track to achieve your business goals. If the plan isn’t working to achieve your goals, you need to change your plan or reconsider if your goals are feasible. Likewise, if your goals change for whatever reason, you’ll also need to evaluate your plan to make sure it’s still compatible with your new goals.

Conventional Business Plans Have Pros and Cons

In a utopian world of business academia, all small businesses would have a formal business plan. There are plenty of reasons a good solid business plan can help a entrepreneur succeed and be more profitable. On the flip side, many businesses, even big businesses, don’t have lengthy plans. Yet they are still very successful. The reality is different for every business and every business owner.

Why to Write a Formal Business Plan

The number one reason you should write a formal plan is to help raise capital. If you’re self-financing or raising money from family and friends, no one is going to force you to write a business plan. In that case, the depth and breath of any business plan you write is going to be entirely determined by you and any business partners you may have. If you don’t have a lot of knowledge about the industry or market you’re going into, writing a formal business plan could be a great way to do research and learn valuable information you may not have otherwise realized. If you have many business partners, it can also ensure everyone is in sync with the direction of the business.

If you’re hoping to secure a loan from a bank or raise capital from an investor, they will likely require a very solid business plan. Many new entrepreneurs rely on loans backed by the U.S. Small Business Administration (SBA), which is a government agency that helps support entrepreneurs and small businesses. The SBA recommends a 38 to 100 page business plan, but it can depend on a number of factors. Other investors, especially venture capitalists, will likely require a similarly detailed plan as well.

Why Not to Write a Formal Business Plan

A business plan is hardly a panacea; starting or running a successful business is way more dependent on a great idea, talent, and hard work. According to an article in the Harvard Business Review, a survey of successful entrepreneurs found that only 30% started with a business plan. The article doesn’t say that planning is bad, the reverse actually. It’s just that they found that other things like an “authentic vision” were far more important.

If you can’t think of a good reason to write a formal business plan, you may want to skip it. Time spent writing a lengthy business plan could instead be spent actually creating the business. You should still do your research, but you can control how far you take it. Keep in mind there is an opportunity cost to writing a lengthy business plan, and it can even impede your progress. If you spend all your time planning and not acting, you may never even start your business.

Another thing to consider is that one of the main advantages of being a small business is agility. This means your business’s goals or objectives may shift, and they may shift very quickly especially in a new business. If something isn’t working early on, you have to be able to shift gears. This may mean large portions of your planning could become obsolete. If you continue following the plan just for the sake of doing it, your business may suffer or even fail. As an entrepreneur, running a successful business should always take precedence over following a plan.

It Doesn’t Have to Be Complicated, But You Need a Plan

You may not need a business plan that would get you an A+ in a class at Harvard Business School, but you do need a plan that defines roughly how you’ll reach the goals of your small business. If you need a lot of financing, you may have to write a lengthy and formal business plan. If not, it can and probably should be as simple as possible, but it does need to be something. You need a goal so you know what you are trying to achieve. You need a plan so you know how you’re currently working to achieve that goal.

Have a story about a business plan? Let us know in the comments. Need help defining a plan for a small business goal or with any other aspect of business strategy or marketing? Give us a call at (800) 640-8082 or email us at info@kapokmarketing.com. We’d be happy to consult with you and your business.