Often business owners create a business plan because someone (perhaps a lender or an investor) ask for one. The better reason to create a business plan is to chart a course for your business and to be able to ask a very important question. There will be more about the question later in this article.

The term “business plan” in my experience often refers to an operational plan – how the business intends to meet the goals set forth in a strategic (long-term) plan. On the other hand, “business plan” could clearly include both kinds of planning (strategic and operational). It is important to think about both. It will enrich you to create a business plan, but how do you create a business plan?

The owners of a business, reflecting upon their own values and goals, should communicate and plan, setting forth a written strategic plan to be followed by the business. This plan should include issues relating to ownership transition and leadership or executive succession. The executives or managers of the business (who may also be all or in part owners) should create an operating plan to accomplish the goals of the strategic plan. Generally, the strategic plan is reviewed and revised annually, but I have seen it done successfully on a quarterly basis. The operating plan will be impacted by any change in the strategic plan and should be immediately revised accordingly. Aside from that, other dynamic factors concerning effective operation of the business may force changes in the operating plan on a more frequent basis.

The best place to start is at the end – the end of the planning cycle. I recommend something five years or less. Envision the business you could sell to a third party (non-owner) for the highest reasonable amount. (Understand that at this point of sale a selling owner cannot be an integral part of the business to obtain the highest possible value for the business.) Then work backwards. What would the business be doing the fourth year to get to the apex in the fifth year, the third year to the fourth, and so forth? If the market will not support the five year plan, something needs to be changed. Therefore, the market analysis becomes the reality check for the projected business status at the end of the planning cycle. The beginning question should be: “How can I develop a business I can sell for top dollar in five years?” In five years you do not have to sell, but you will develop a better business if you have that goal.

There are a number of ways to construct plans from questionnaires and software; there is nothing wrong with adding structure and detail in that way. Do the marketing and conceptual work first to know if you can go where you want. After you have established this perspective, the details can fall into place. This is not to say that the details are unimportant – they can make you or break you – but they must be within a frame that is realistic and defined.

The purpose of doing a business plan is that it gives you the ability to ask a very important question: “Why didn’t things go as in the business plan?” Answering that question is a valuable business analysis tool. Of course, the plan is the prerequisite to having the analysis tool.

Angela had heard it so often that it sounded like a mantra: Write your business plan!

The business itself was not an issue. It was going to be a business featuring her handmade butterfly inspired caftans. Her creativity was inspired by the spectacular Monarch butterflies that settled in her home town every year. She had the colors and designs ready. Now she needed to open her business.

That was the first thing that stopped her. What kind of planning did she need to do before opening her business? What licenses did she need? What taxes would she have to pay? Who were her clients going to be? What kind of profit could she make? Where could she go to get information? She got dizzy thinking about it. She was an artist, not an entrepreneur!

SCRIBBLES AND NOTES

So she sat down to write her business plan. She figured costs and taxes and leases and employees and advertising, working through a series of worksheets, step by step. She busted a few pencils, but never got near a computer. She even went to her local banks and met with two different bankers. And when she finished, she had an amazing discovery: she didn’t even want a real store to start out. She wanted to start out on the internet. She figured that the international potential of millions of customers, plus the low overhead of an internet business, made it a better option than opening her own brick and mortar store.

So that is exactly what she did. That was nearly two years ago, and she has done very nicely.

THE FORMAL PLAN

But now she is writing a second plan for her business. Now she needs to expand and hire seamstresses, probably contract workers. And so many people have asked if they could come by her store that she now needs a store/workshop. She is really looking forward to the store as a way of working directly with some of her clients.

But now she needs financing, so she is writing a new plan for her business.

Rightfully, Angela knew that the plan that she created for herself just will not do for bankers. The one she wrote for herself was very analytical, with lots of options explored and lots of worksheets. Now that her direction is in place, and a successful track record backs her up, the business plan she is writing is of a very different sort. This one is a sales presentation for the banker. She is even putting lots of photos of her designs.

Angela instinctively knows what many entrepreneurs struggle with: The business plan that you do for yourself is NOT the business plan that you can use for funding.

APPLES AND ORANGES ARE BOTH ROUND, AREN’T THEY?

This sounds so very basic, but many entrepreneurs simply miss the mark. For example, in the business plan you do for yourself, you want to list out all the competitors that you might have, and compare your own business to theirs. Some of them, truthfully, might even be better than your company. But in a business plan for financing, the object is different. Here you acknowledge that there is competition, but the focus is on your business with your clientele base.

Or in your own business plan you may list that you have money in a credit card that you can pull if necessary. But bankers don’t want to hear about that: it is poor business to use your credit card to finance your business.

The two types of business plans are a different mind set, a totally different approach. One you pick right off the tree, and the other you wrap into a fresh hot tart.

WHY, O WHY, O WHY O?

So your first job is to answer the question: Why am I writing this business plan? Am I investigating a business, and looking for the best options? Or am I writing this for a banker/investor?

Once you’ve got the answer to that question, the rest falls into place.

… PUTTING ON THE RITZ

Once you have your scribbles and notes, getting everything together for the formal plan is much easier. You know where to look, what information is valid and what is not, and you probably have a track record behind you that you can flaunt a bit.

VARIATIONS ON A THEME

Sometimes entrepreneurs will look for microloans, or approach Aunt Lizzie for a loan, or do any number of other things that need a more refined business plan. That is great. Just target the business plan to the intended audience, and you will hit all the right notes.

I’ve seen it all too many times – a business plan for a small business startup that once the business gets going, their business plan simply sits on a shelf gathering dust. It’s sad to see this waste of time and energy. It really shouldn’t be that way. Worse yet, most business plans are put together for financing and nothing else.

A business’ start up business plan should be a valuable document in managing the small business. In fact, it should be a living thriving document critical to the success to the business. If your plan is not up to the task, then fix it or create a new one that is. Here are some critical elements to a good business plan that allows it to be a management tool rather than just a bother.

1. The business plan should be a realistic predictor of the future of the business. This is particularly true for a business start up.

2. The plan should be based on solid conservative assumptions backed by research not one of these “If 20% of the market buys X products or services from us, then….” The better the research, the better the plan and often the better the business will perform.

3. The plan should be a living document, easily changed to reflect new discoveries in the market, competitors, costs, etc. By updating your business plan with newly discovered information will give you a new picture of what your businesses’ results will look like. That way, a) It will be a better base to make decisions from and b) It will allow you to do “what ifs” on various business scenarios.

4. It should be very detailed so minor changes in your business will roll through to both the bottom line in your P&L as well as your Balance Sheet.

5. It should have a cash flow component, as the lack of cash is the biggest reason why most businesses fail. As a matter of fact, many businesses that fail were making money. But no matter how much money a business is making, without the cash to pay bills and buy materials, etc, a business is doomed.

So if you are thinking of or are in the process of starting a new business, make a business plan a critical, living and breathing part of your business start up process and beyond. Your pocketbook will thank you for many years to come.