Do You Really Need a Business Plan?

Image Credit: Twenty20

One thing many beginning business owners wonder about is whether or not they need a business plan.

The short answer is: Yes. You do need a business plan. At the very least, you need something to guide you as you grow your business.

The real question should be: "What kind of a business plan do I need?" Reason being that if you're planning on getting a bank loan or finding investors then your business plan needs to be far more detailed than if you're bootstrapping.

Business Plan If You’re Bootstrapping

Bootstrapping refers to funding a business over time with the money that is coming in from the business. You may also put up some of your own money to get started.

This is unlike using a loan where you're taking on business debt. It's also unlike looking for investors where you're using other people's money.

Even though it's your money, you still need a business plan. Otherwise, you run the risk of not making a return on your investment. The difference is your business plan may not need to be as detailed and in-depth because a bank isn't requiring certain information from you.

On the one hand, this is kind of a relief because you may not need to dig up so much data. On the other hand, you also don't really have a format to go off of, which is why many business owners who are bootstrapping make the mistake of skipping this part. Or, since there is no format when you're bootstrapping, business owners get overwhelmed trying to create a more traditional business plan when it may not actually be needed.

At the very least, you do need to figure out the answers to some of the following questions:

How is this business actually going to make money?

What is the marketing plan for the business?

What are the operating costs?

What are your target revenue goals and by when are you planning on achieving them?

How is the business organized?

Even if you're not necessarily looking for potential sources of funding, creating a business plan will help you figure out structure, marketing and some of the financials.

Business Plan If You Want to Take Out a Business Loan

Some businesses take on debt as a form of capital. It's a very common practice among corporations and small business owners can take advantage of it as well.

If you're applying for a business loan through a traditional lender (i.e., a bank) you're going to need to create a pretty in-depth business plan that breaks down all the financials. They'll also want to take a look at how the business is currently doing financially.

Unfortunately, since The Great Recession there is sometimes a bit of a Catch-22 when it comes to trying to get business loans from a traditional lender. You could have the best business plan they've ever seen, but according to a report published by Harvard Business School, many business owners are complaining that traditional banks simply aren't lending to small businesses unless they are already making money. Many are also being negatively affected by their personal credit scores.

That's where alternative lenders have come into play. These are run by private companies and are a bit more lenient when it comes to lending money. While you may not need an in-depth formal business plan and they won't look at your credit score, they are going to want to take a look at what industry you work in and the current cash flow in your business.

Business Plan if You Want Investors

A business plan is especially important if you want to raise capital from investors. You have to convince these people to take a calculated risk by handing you their hard earned money.

With investors, you'll need to justify where the money will be spent and how it's going to make a profit with as much detail as possible. In other words, when you want investors you can't just slap random ideas together. The business and its processes need to be laid out in explicit detail for serious consideration.

While every business is in need of a business plan, the reality is a bootstrapping small business owner may not need to same kind of plan as a startup looking to raise capital from investors. Regardless of what kind of a business you have and how it's being funded, even the most basic business plan can help you determine some key factors that will lead to your success.