Why It Is Important to Create a Business Plan

Most successful new businesses use a good business plan before they get started. Here are three ways a good business plan can help you, and why it is worth the effort to create one:

  1. A good plan formalizes assumptions
  2. Every business is created with certain underlying assumptions about the business environment, and markets it is attempting to gain a foothold in. A good plan forces you to write down these assumptions, and make the implicit into something more explicit. In this way, if your environment changes (so that your previous assumptions no longer hold true), you will be more apt to recognize the changes, and make appropriate alterations to your business plans to address these. Similarly, if you revise your plan regularly, any new assumptions should be included, and irrelevant assumptions dropped.

  3. A good plan removes guesswork by providing actual numbers
  4. Many business ideas initially appear good, yet when you test them against actual real-world numbers, they may not be worth pursuing. It is much better to discover obvious problems with a plan, when you are still in the stage of creating pro forma (projected) financial statements. After all, a good plan may still encounter some problems when you attempt to execute it, but a bad plan which can never work will be incredibly frustrating, no matter how good your execution is. Good plans prevent you from wasting the time, money, or efforts on a losing effort.

  5. A good plan can help you win over investors
  6. This is the reason many business owners create a business plan, but even a great plan is no guarantee that investors will back you. However, if you do not have a business plan, that can be a strike against you with many investors. Knowledgeable investors will want to be able to check your numbers against typical firms in your industry, and to verify your assumptions against their own expectations. By the same token, potential investors also like to see intellectual property protections (patents, etc.), established customer groups, management roles adequately filled, and other signs that your business is less of a risk than other investment opportunities that they have available to them instead.

In other words, a good plan helps you by making implicit assumptions more explicit, removing the guesswork, and winning over investors, all of which make it more likely that your new business will be successful. For all of these reasons, a great business plan is invaluable to have.