Small business owners often are seized by a vision and driven to see it through. Yet a vivid image in the mind’s eye is a sketchy road map at best.
Creating and updating a business plan is critical for smaller companies, yet many owners do so only to appease lenders and investors. Blame it on the rugged individualism common to entrepreneurs. They’re not averse to setting up a plan, experts say, but often avoid adhering to one, fearing it will lead to inflexibility and conformity.
“Everyone who starts a business has the skeleton of a business plan in mind, but it may not be fully flushed out, so they don’t see opportunities that come along,” says Ken Yancey, chief executive of SCORE, a nonprofit small business counseling and education group. “Luck is the intersection of opportunity and preparedness.”
Says Brenda Hopper, director of New Jersey’s Small Business Development Center program: “A business plan needs to be fluid. It isn’t something you write and put on the shelf. It’s a working, living document.”
The U.S. Small Business Administration has no statistics on what percentage of small companies have a business plan — let alone update them periodically.
Yet the value of maintaining a business plan is well established. On one level, it forces owners to take stock of their operations and ever-changing market and competitive conditions. On another, it gives rise to such esoteric but critical questions as “Why do we exist?” and “What value are we creating for people?” that bear revisiting to help define a business and develop its character.
“Many entrepreneurs operate on gut intuition, which works fine for some,” says Monro B. Lanier III, chairman of the National Association of Small Business Investment Companies and head of Huntsville, Ala.-based Hickory Venture Capital. “But most need to subject their efforts to a harder analysis. Thinking strategically and competitively is very important.”
“It’s so easy to get caught up in the here and now — people clamoring for attention and fires to put out — and say I’ll look at it tomorrow,” says Julian Lange, Babson College professor of entrepreneurship and public policy and former chairman of the New Hampshire governor’s task force on entrepreneurship. “Where do you think your business is headed in the next three years? That’s a question that you should be asking repeatedly.”
Generally speaking, business plans have two components: an overview of the business and detailed financial projections.
The overview would address each of the following:
- A description of the business
- Products or services offered
- The market, currently and in the future
- The state of competition
- Opportunities and risks
- Management structure
The financial data and projections would cover:
- Sources of funding
- Capital equipment list
- A balance sheet
- Break-even analysis
- Income projections, with details by month for the first year and by quarters for the second and third
- Cash-flow projections, again, by month the first year and by quarter for the following two
Additionally, an addendum might include supporting documents such as resumes, credit reports, reference letters and copies of leases, contracts, and other legal documents.
The plan also needs to address the timing of future expansion based on various sales goals, said Yancey of SCORE. That might include when to take on new product lines and additional employees, and in what capacities.
Recalibrate, Now and Then
Once completed, the plan becomes a guiding document and a performance measuring tool. VC Lanier recommends updating a plan at least annually to take into account changes in the market and competitive landscape, and to play to strengths and address weaknesses.
“Updating a plan is very important — and not just updating numbers,” says Lanier, a former co-chairman of the Venture Capital Institute. “It’s very easy not to do this, especially for small business owners who don’t have anyone looking over their shoulders.
“A lot can happen in a year,” he says. “Competitors respond to what you’re doing. Technology changes. Customer needs change. Regulations change. At some point, your business may be out of alignment, and you might not realize it until you’re further out of alignment than you’d want to be.”
Hopper of New Jersey’s Small Business Development Center sees a common shortcoming in many plans she’s reviewed — haste and brevity. “A lot of people just draft a document to get the money they need. They have bullet points that could be built out to develop sound strategies.”
Adds Lanier: “A business plan does not success create. You might go through the process and be wrong, or misassess, or do a lousy job of executing. But if you don’t have one, success is much more a matter of chance than if you do.”
Lange recommends that, even if you don’t formally update the plan periodically, use it as the basis for strategy sessions with top managers every six months. “Really take time off, at least half a day, and concentrate on the big picture issues.”
Adds Lange, “It isn’t the plan itself that’s crucial. It’s the process you develop to keep up with what’s unfolding before you. As they say, If you don’t know where you’re going, anywhere will do.”