My view is that whilst a business plan is no substitute for the entrepreneurial drive of owner-managers, it is nevertheless a very effective tool in helping a firm prepare itself for the future.
Indeed, a good business plan will define the business and will help the management team to work together towards the achievement of common goals.
It helps allocate resources properly, handle unforeseen complications, and to make the right decisions. It will also force the company to undertake up-to-date research to fully understand the industry or market in which they want to operate.
Most importantly, it enables the feasibility of the business to be examined in detail both internally and externally, especially when a business is using its to attract investors. Whilst the all owner-managers will have an idea of where they want to take the company in the future, not all will have this written down in a way that can be communicated to all stakeholders including key individuals within the business.
In addition, many will be so busy dealing with day-to-day operations that they have little time to consider the strategic future of the company which can be addressed through working on a business plan.
It would seem that the majority of SMEs agree with me with recent research from the Centre for Economics and Business Research (CEBR) showing that over half of SMEs are working to a detailed business plan and of these, 70% anticipate an increase in their expected revenue growth in 2016 as a direct result of this strategic approach.
Unfortunately, the study also showed that 26% of UK SMEs surveyed say they do not have a business plan in place and are therefore likely to be operating without basic objectives, revenue targets or a plan to manage cash flow.
According to the CEBR, this is having a real impact on the UK economy with estimates that bad planning is costing these businesses around £25 billion every year and that more effective business planning could improve their underlying financial performance.
So what makes a good business plan? The most important starting point is an executive summary which communicates succinctly what the business does, the strength of your management team, why customers will buy your product or service and, crucially, how it will make money.
Within the plan itself, it is critical to present your business model and to demonstrate that you understand your market opportunity, especially in providing answers on key areas such as the size of your target market, the growth of that market, and how you will deal with any opportunities and threats.
Next is consideration of the competition. Some of the business plans I have read during the last twenty years seem to think that their product or service is so unique that there are no competitors.That is never the case and it is critical to understand who will be competing for the customers you want to attract to buy your product or service.
Where are they located? What are they selling? Are they competing on price, quality or service? Why are customers buying from them rather than other businesses? It is also important to consider businesses that are indirect competitors catering to a different niche but who could be going after your clients in the future as the market evolves.
Then there is the team behind the business and this is what many investors will be focusing upon, namely the expertise and experience of the founders and their staff, and what their skills, qualifications and previous knowledge will be bringing to the business as it grows.
However, founders, investors and other stakeholders will be most interested in how much money is the business projected to make. At the bare minimum, there will need to be estimated profit-and-loss, balance sheet and cash-flow statements for the next three years to determine the financial performance of the business going forward.
So the best business plans will focus on the business model, the market opportunity, competitors, the management team and the finances behind the firm going forward.
Certainly, having a clear direction as to where the company is going can only help its development and if firms can at least put something together in a plan around these five areas, then as the CEBR note, it could improve the financial performance of both individual companies and the overall economy going forward.