Not every business can get away with something as simple as the initial business plan for Compaq Computer. It was a sketch of a portable personal computer, scratched on the back of a placemat from House of Pies Restaurant and Bakery in Houston.
This valuable placemat is ensconced in a glass case in Compaq’s headquarters. That placemat was enough to persuade venture capitalist Ben Rosen to invest in the budding business proposed by three engineers, a business that turned into the fastest-growing startup ever founded up to that time.
But that is very much the exception. Don’t count on your back-of-the-envelope jottings to provide sufficient justification to persuade your unfriendly local loan officer to approve that six-figure line of credit for your business. No, you must develop a workable business model for your startup or a plausible plan for the major expansion of your existing business.
Like all business plans, yours needs to answer the key questions about the purpose of your business: What will it do, and how will it earn money doing it, on a sustainable basis?
Small businesses in general are more susceptible to business failure caused by inadequate business planning. There is less leeway for financial missteps. A million dollar boondoggle that causes a quarterly profit dip in a large enterprise can cripple a small business.
You may not have a choice about whether to develop a business plan. Most businesses are required by their source of financing to create one. Before a bank will advance a loan, it wants to know how the money will be used and how it will be repaid. Before your board of directors or your division chief approves your annual budget, especially with that big new investment you’d like to see them make, they want a convincing rationale explaining how the risk of this investment will generate rewarding profits and when.
Financials are an important part of every business plan. But it’s not the only component, nor even the most important. Before you can intelligently talk about finances, you must create a business model, which is the economic rationale for the existence of the business.
Writing your business plan helps refine your thinking, and that may be its greatest value to you. When you first set down your plan, it may look great. But in the cold light of the following day, you may realize it has some holes or requires additional explanation.
Do you need a business plan even if you don’t require financing? A loan officer is like a friend who will lend you an umbrella, as long as it’s not raining. When you have a desperate need for financing, a bank has you over the proverbial barrel. Don’t count on getting a good deal for financing when you desperately need the money.
So the best time to prepare the financial component of a business plan is when you don’t need money.
If your plan shows that your financial requirements are modest and could in all probability be self-financed, that just whets a banker’s financial appetite. You’ll look like a good client to sign up for a line of financing because it appears as though your business will have no problems paying back any money borrowed. Bankers like low risk. A well-thought-out business plan lets you show how you will manage risk, which is the thing bankers like second best.