A. What Is a Business Plan?

A business plan is a written statement that describes and analyzes your business and gives detailed projections about its future. A business plan also covers the financial aspects of starting or expanding your business—how much money you need and how you’ll pay it back. Writing a business plan is a lot of work. So why take the time to write one? The best answer is the wisdom gained by literally millions of business owners just like you. Almost without exception, each business owner with a plan is pleased she has one, and each owner without a plan wishes he had written one.

B. Why Write a Business Plan?

Here are some of the specific and immediate benefits you will derive from writing your business plan.

1. Helps You Get Money

Most lenders or investors require a written business plan before they will consider your proposal seriously. Even some landlords require a sound business plan before they will lease you space. Before making a commitment to you, they want to see that you have thought through critical issues facing you as a business owner and that you really understand your business. They also want to make sure your business has a good chance of succeeding. In my experience, about 35% to 40% of the people currently in business do not know how money flows through their business. Writing a business plan with this article teaches you where money comes from and where it goes. Is it any wonder that your backers want to see your plan before they consider your financial request? There are as many potential lenders and investors as there are prospective business owners. If you have a thoroughly thought out business and financial plan that demonstrates a good likelihood of success and you are persistent, you will find the money you need. Of course, it may take longer than you expect and require more work than you expect, but you will ultimately be successful if you believe in your business.

2. Helps You Decide to Proceed or Stop

One major theme of the article may surprise you. It’s as simple as it is important. You, as the prospective business owner, are the most important person you must convince of the soundness of your proposal. Therefore, much of the work you are asked to do here serves a dual purpose. It is designed to provide answers to all the questions that prospective lenders and investors will ask. But it will also teach you how money flows through your business, what the strengths and weaknesses in your business concept are and what your realistic chances of success are. The detailed planning process described in this article is not infallible—nothing is in a small business—but it should help you uncover and correct flaws in your business concept. If this analysis demonstrates that your idea won’t work, you’ll be able to avoid starting or expanding your business. This is extremely important. It should go without saying that a great many businesspeople owe their ultimate success to an earlier decision not to start a business with built in problems.

3. Lets You Improve Your Business Concept

Writing a plan allows you to see how changing parts of the plan increases profits or accomplishes other goals. You can tinker with individual parts of your business with no cash outlay. If you’re using a computer spreadsheet to make financial projections, you can try out different alternatives even more quickly. This ability to fine tune your plans and business design increases your chances of success. For example, let’s say that your idea is to start a business importing Korean leather jackets. Everything looks great on the first pass through your plan. Then you read an article about the declining exchange ratio of U.S. dollars to Korean currency. After doing some homework about exchange rate fluctuations, you decide to increase your profit margin on the jackets to cover anticipated declines in dollar purchasing power. This change shows you that your prices are still competitive with other jackets and that your average profits will increase. And you are now covered for any likely decline in exchange rates.

4. Improves Your Odds of Success

One way of looking at business is that it’s a gamble. You open or expand a business and gamble your and the bank’s or investor’s money. If you’re right, you make a profit and pay back the loans and everyone’s happy. But if your estimate is wrong, you and the bank or investors can lose money and experience the discomfort that comes from failure. (Of course, a bank probably is protected because it has title to the collateral you put up to get the loan. See Article 4 for a complete discussion.) Writing a business plan helps beat the odds. Most new, small businesses don’t last very long. And, most small businesses don’t have a business plan. Is that only a coincidence, or is there a connection between these two seemingly unconnected facts? My suggestion is this: Let someone else prove the connection wrong. Why not be prudent and improve your odds by writing a plan?

5. Helps You Keep on Track

Many business owners spend countless hours handling emergencies, simply because they haven’t learned how to plan ahead. This article helps you anticipate problems and solve them before they become disasters. A written business plan gives you a clear course toward the future and makes your decision making easier. Some problems and opportunities may represent a change of direction worth following, while others may be distractions that referring to your business plan will enable you to avoid. The black and white of your written business plan will help you face facts if things don’t work out as expected. For example, if you planned to be making a living three months after start-up, and six months later you’re going into the hole at the rate of $100 per day, your business plan should help you see that changes are necessary. It’s all too easy to delude yourself into keeping a business going that will never meet its goals if you approach things with a “just another month or two and I’ll be there” attitude, rather than comparing your results to your goals.

C. Issues Beyond the Plan

I have written this article to provide you with an overview of the issues that determine success or failure in a small business. Experienced lenders, investors and entrepreneurs want a plan that takes these issues into account. Of course, this article can’t cover everything. Here are some of the key business components that are left out of this initial planning process.

1. Articlekeeping and Accounting

This article discusses the numbers and concepts you as the business owner need to open and manage your small business. You have the responsibility to create articlekeeping and accounting systems and make sure they function adequately. (Some suggestions for setting up a system are contained in Article 6, Section D.) One of the items generated by your accounting system will be a balance sheet. A balance sheet is a snapshot at a particular moment in time that lists the money value of everything you own and everything you owe to someone else.

2. Taxes

While there are a few mentions of tax issues throughout the article, most of the planning information doesn’t discuss how taxes will be calculated or paid. The article focuses its efforts on making a profit and a positive cash flow. If you make a profit, you’ll pay taxes and if you don’t make a profit, you’ll pay fewer taxes. A CPA or tax advisor can help you with tax strategies.

3. Securities Laws

If you plan to raise money by selling shares in a corporation or limited partnership, you’ll fall under state or federal securities regulations. You can, however, borrow money or take in a general partner without being affected by securities laws. A complete discussion of these issues is beyond the scope of this article. For now, take note that you must comply with securities regulations after you complete your plan and before you take any money into your business from selling shares or partnership interests.

4. Your Management Skill

This article shows you how to write a very good business plan and loan application. However, your ultimate success rests on your ability to implement your plans—on your management skills. If you have any doubts about your management ability, check out the resources in Article 12. Also see Article 11 for a thought-stimulating discussion of management.

5. Issues Specific to Your Business

How successfully your business relates to the market, the business environment and the competition may be affected by patents, franchises, foreign competition, location and the like. Of necessity, this article focuses on principles common to all businesses and does not discuss the specific items that distinguish your business from other businesses. For example, this article doesn’t discuss how to price your products to meet your competition; I assume that you have enough knowledge about your chosen business to answer that question.