Why business plans are important

Is a business plan really necessary? Are the effort and money invested worthwhile? Isn't it possible to wing it and avoid the planning stage?

In order to get your small business off the ground, you'll need to register your business name, receive an IRS tax ID number and decide how you'll organize your business. When it comes to starting, growing and developing your business, having a business plan is really important.

Below are the reasons why you need a business plan.

1. To demonstrate your commitment to your business.

A comprehensive business plan is required to demonstrate to all stakeholders — workers, investors, partners, and yourself — that you are dedicated to the organization's growth. Developing your strategy encourages you to consider and choose the techniques that will fuel your progress.

2. To create milestones for the business.

The business plan should clearly outline the long-term milestones that are critical to your venture's success. A milestone, according to Guy Kawasaki, is anything substantial enough to bring home and tell your spouse about (without boring him or her to death). Would you inform your spouse that you made some changes to the company brochure? Most likely not. However, you'd certainly spread the news when you'd launched a new website or exceeded $1 million in yearly sales.

3. To have a more complete understanding of your competitors.

Creating a business strategy compels you to do a competitive analysis. Every business faces competition, whether direct or indirect, and it is vital to understand your business's competitive advantages. And, if you don't already have competitive advantages, to determine how to get them.

4. To better understand your customer. 

Why do people purchase when they purchase? Why don't they do it when they don't have to? A comprehensive customer study is critical to developing an effective business plan and operating a profitable organization. Not only will understanding your consumers enable you to design better goods and services for them, but it will also enable you to reach them more cost-effectively via advertising and promotions.

5. To document your revenue model.

How exactly will your business make money? This is a critical question to answer in writing, for yourself and your investors. Documenting the revenue model helps to address challenges and assumptions associated with the model. And upon reading your plan, others may suggest additional revenue streams to consider.

6. To determine your financial needs.

Does your business need to raise capital? How much? One of the purposes of a business plan is to help you to determine exactly how much capital you need and what you will use it for. This process is essential for raising capital for business and for effectively employing the capital. It will also enable you to plan ahead, particularly if you need to raise additional funding in the future.

7. To attract investors.

A formal business plan is a basis for financing proposals. The business plan answers investors’ questions such as: Is there a need for this product/service? What are the financial projections? What is the company’s exit strategy? While investors will generally want to meet you in person before writing you a check, in nearly all cases, they will also thoroughly review your business plan.

8. To attract partners.

Partners also want to see a business plan, in order to determine whether it is worth partnering with your business. Establishing partnerships often requires time and capital, and companies will be more likely to partner with your venture if they can read a detailed explanation of your company.