Business Plans for Startups: Key to Entrepreneurial Success

Writing a proper business plan is a challenging task because it requires knowledge of various business functions. These functions include management, marketing, sales, human resources, production, and accounting and finance. For many young entrepreneurs with an exciting and innovative idea for a business, it is tempting to jump into startup with minimal planning. The thought of developing a business plan seems more like an old-fashioned (pre-internet) barrier to startup than a roadmap for success.

According to the Bureau of Labor Statistics, starting a small business is the most common market entry point for entrepreneurs. Unfortunately, the Small Business Administration also says that one-third of new businesses will close within two years. One of the top reasons is lack of a business plan. Yes, the business plan really is a tool for success. It encourages the excited entrepreneur to step back, identify the vision for the business and walk through the business functions that must mesh together to create an ongoing operation.

Ready to Answer Questions?

There is another important reason for developing a business plan. Some enterprises are started without a need for investors, but most do need financial help for startup and to cover operating costs in the early months. Unless the money comes from family and friends, the only way to convince an angel investor or equity investor to commit funds is to write an impressive, high quality business plan. One of the advantages of submitting the business plan to investors is that they ask a lot of questions about things like operations, target market, customer demographics and cash flow, to name a few. If the young entrepreneur is prepared to answer them, the business is much more likely to be funded and to beat the odds of potential failure.

There are many reasons for developing a business, and following are some of the most important to the young entrepreneur ready to jump into business.

1. Every business needs a business model - If the entrepreneur is not familiar with the term "business model" and all it entails, the business is not ready to launch. The business model identifies the sources of revenues and how it will make a profit with certain customers, products and financing. Developing the business model is a process of mapping out how the business will generate value for customers on an ongoing basis. Creating value leads to revenue flows. The business model is integral to the business plan.
2. Every business needs a mission statement – Saying, "The company will sell new technology to people under 30 years old," is not a mission statement. The reason it does not pass the test is because it fails to define the core principles of the business. Young entrepreneurs are often focused on their wonderful new products or services but do not articulate the principles of operation that will keep decision-making on track.For example, is the business selling high quality, green technology that improves the lives of consumers while protecting the environment? If so, there should not be a temptation to sell cheap, non-recyclable products down the road. The mission statement usually appears right after the Executive Summary in the business plan because it guides the rest of the decisions made, from sources of materials to the target market.
3. Every entrepreneur must know the market – Doing in-depth industry and market research is critical for all business startups - even sole proprietors. Unless the entrepreneur fully understands the market segment the business will target, how is it possible to price and market products and services? Even more importantly, how can the entrepreneur know the business is offering customers a solution or meeting a market need?It is disappointing to develop a great product or service that no seems to want to buy. It could be poor marketing, but it could also be a lack of understanding of the market. A business plan includes a well-researched marketing and sales plan for this reason.
4. Every entrepreneur must do the math – Financial projections are presented as proforma statements in the business plan, usually for at least the first five years of operation. They need to follow accounting standards, and especially if the entrepreneur is looking for investors or plans on requesting a bank loan. Anyone can go online and be open for business in a matter of days via a website, but the enterprise is almost certainly doomed without a solid and reasonable financial plan.
   

Fly the Business with a Map

Even if sales were to unexpectedly exceed all imagination, how will the business keep up with demand? Will people have to be hired? Will vendors need to provide more inventory and quickly? Where will the cash come from to fund success? A well thought out financial plan helps the entrepreneur think about important topics like cash flow, revenue flows, employee costs, vendor payments and much more.

These are four excellent reasons an entrepreneur needs a business plan. It is a critical document that reflects good planning. Without out, a startup basically flies by the seat of its pants. In today's competitive environment, that is not likely to lead to success. There are plenty of great ideas that died a slow death due to lack of planning, and it is too bad. If the entrepreneurs had slowed down, developed a business plan, and stayed on mission, the world may already be enjoying the next Google or Amazon or Apple.