Reasons for a business plan:
Externally
- To raise finance from a bank loan or an investor.
- To analyse the market.
- To make sure that there actually is a gap in the market to make sure that the company’s good/service is financially viable.
- To find out the amount of demand for this product/service
- Determine the amount of competition and if there is anything that your company can do to stay ahead of the competition.
Internally
- To set goals and objectives
For this, the business needs a clear idea as to where the business is heading, furthermore, this enables a clear strategy to shape the decisions by mission statement, Aims, Objectives. The objectives need to be SMART. However, the short term objectives may not be about profit maximization.
- Help gain an understanding of how the business needs to be setup and run.
- Determine what adjustments, if any, need to be made.
- Can also identify if there are any expenses that can be avoided.
Reasons for constructing a business plan
.To Map the Future
A business plan is not just necessary to secure funding at the start-up stage, but is a vital aid to help manage a business more effectively. By committing your opinions to paper, you can be aware of your business better and also chart particular courses of action that need to be taken to improve your business. A plan can point alternative future prospect scenarios and set detailed objectives and goals along with the resources required to achieve these goals.
By understanding your business and the market a little better and planning how best to operate within this environment, you will be well located to ensure your long-term success.
To Support Growth and Secure Funding
The majority of businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. However, regardless of the fact that the market for funding is highly competitive, all prospective lenders will require access to the company’s recent Income Statements/Profit and Loss Statements, along with an up-to-date business plan.
Develop and Communicate a Course of Action
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other alternative are effectively narrowed and the company is allied to focus on key activities. The plan can allocate milestones to specific individuals and ultimately help management to monitor progress. Once written, a plan can be disseminated quickly and will also prompt further questions and feedback by the readers helping to ensure a more collaborative plan is produced.
To Help Manage Cash flow
The delicate management of cash flow is a basic requirement for all businesses. The reason is quite simple--many businesses fail, not because they are unprofitable, but because they ultimately become bankrupt (i.e., are unable to pay their debts as they fall due). While the break-even point--where total revenue equals total costs--is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important.
Cash flow management then becomes more very significant when businesses pursue investment opportunities where there are significant cash out flows, in advance of the cash flows coming in. These opportunities need to be assessed against any seasonal variation in the business and the timing of the flows. However if you are a cash only business, you can bank the income right away; however, if you sell on credit, you receive the cash in the future and that's why you may need to pay some of your own payment before that income changes your account. This will put a more tension on the business solvency and therefore a well structured business plan will help you manage funding needs in advance.
.To Support a Strategic Exit
A last, at some period the owners of the firm will decide it is time to exit. Considering the possible exit plan in advance can help tell and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.
Strategies include;
- Acquisition by competitors- buying of one company by another competition.
- Mergers- a combination of two companies into one larger company.
- Family succession- continuing the business after parents.
- Management buy-outs - form of acquisition where a company's existing managers acquire a large part or all of the company
Investment decisions can be taken in the present with an idea on the future by a well-thought-out business plan. For example, if the most attractive exit route appeared to be selling to a competitor, present day management and investment decisions could spotlight on activities that would boost the company’s attractiveness to that competitor.
Other reasons for constructing a business plan are listed below,
- Giving business a clear picture of the various stages they need to go through to be successful
There are many business ideas that remain because of a need to analyse whether an idea is viable before risking finance etc. Also assess level of external assistance required. The identify possible constraints which will have to be dealt with the business.
- Ensuring the monitoring & reviewing of progress is made more straightforward.
The business must monitor its progress against the objectives. It also needs to take correction where it is necessary before it is too late. However, if your business goals are unrealistic then you have to reset your goals. The stake holders of the business will want reassurance that the business is doing well so that they know there job is safe. Finally all of the objectives should be measurable.
- Persuading stakeholders to get involved.
A good business plan is the most important way to demonstrate and from there you can demonstrate your ideas into practise. You would also have to show your plan is workable to get people to invest. If financers choose to invest in the business they would want to get their money back or get more back from what they invested. You would need to reassure stakeholders of the management capacity.
