Do You Really Need a Business Plan?

Can You Start a Small Business Without a Formal Business Plan?

Man standing in his office looking at plans
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Definition of a Business Plan - What is a Business Plan?

I'll be the first to admit, I've promoted the idea that for a small business to succeed, it needs a formal business plan. However, after considering the issue I'm having second thoughts on small business plans and I'm not convince that every small business needs a formal business plan.

Because typical formal business plans that can run from 50 to 100 pages of materials and sometimes even more - and can take months to prepare - not including time spent learning how to put one together - it would seem that if you don't need one that you should consider getting your business started without preparing one.

Does Having a Formal Business Plan Ensure Success?

A study completed by Babson College would suggest that at least for those who are not seeking outside funding, having a formal business plan before starting a small business or not having one at all really made no difference in the ultimate success of the business.

Keep in mind that the business plan industry is huge and this wasn't welcome news to them. But you really have to wonder if you wouldn't be better off taking the time needed to create a formal small business plan and using it instead to get your business up and running. Many home business don't require outside funding at start up anyway, especially those who plan to start their home business part-time while looking after the kids or while holding on to their full-time job. For those people, a business plan might be the last thing they really want to do.

How Creating a Business Plan Can Stifle Your Business

I think most would agree that one advantage enjoyed by business startups is the power of the "entrepreneurial spirit" - the ability to act quickly and take advantage of special opportunities.

To be "market movers" if you will, and not "market followers".

Established businesses may have so much corporate bureaucracy or standard procedures to follow that they cannot act quickly enough to seize an opportunity before their competitors corner the market. Taking month after month to prepare a business plan can mean opportunities lost for some who want to start a small business - especially a home business.

What happens instead is that you can get entrenched in "analysis paralysis" while you're writing your business plan with the end result that you never actually start the business.

Amazingly enough, Matt Coffin, founder and CEO of LowerMyBills.com used a 10-page PowerPoint presentation to secure $4 million in funding from investors. Several other start-up entrepreneurs have indicated that they would prefer to pitch their ideas through a presentation that doesn't include an actual business plan.

Who Does Need a Formal Business Plan Then?

If you'll need outside funding in order to start your home business, you should expect to prepare a small business plan. Especially if you're planning to secure funding through a US Small Business Administration (SBA) approved lender, but really for any commercial lender and even for many who are seeking venture capital or angel investor funding. But in that case, the most important thing is that you know what you're talking about and that you've thought through your business idea carefully and have at least some reliable data to support the likelihood that you could be successful.

You Still Need to Plan Your Business

I'm not saying that it's not important to plan before you start a business- it is critical.

You still need to know if there's a market for you products or services and you still need to know what the financial potential, startup costs and breakeven point will be.

You also need to have a good idea of how you're going to deliver your products and services and you need to set up a system for keeping good business records. You still need to know what legal restrictions or requirements are in place for your home business idea and you need to plan for how you will handle cash flow and taxes.

The real issue then is not whether you need to plan before you start a home business - you must - but whether you need to take the time and effort to develop a formal business plan document.

What would be more important is that you understand your target market and that you establish measurable goals for your business. Then, once you're up and running keep track of how you're doing, make necessary adjustments and learn from your mistakes.

Planning Ahead

There's nothing stopping you from preparing a business plan later on - after you've learned from some of your mistakes, you have a better feel for the viability of your market and the potential for income and the resources you'll need to continue to succeed. In fact, you may find it useful to set up the outline for your business plan and fill in the details as they become apparent to you. In the meantime, try to make some money and learn what it will take to make your business a success.

Don't forget too, that if you're thinking of buying a franchise or other type of business opportunity you most definitely need to research that opportunity thoroughly before you invest your hard-earned savings in what could turn out to be a loser.