QUESTION: Some friends have told me that I should have a business plan for the small business I am planning to launch in the near future. What do you think?
ANSWER: You will most assuredly need a plan for your business. You may, or may not, need a formal business plan.
Every business must answer three questions. They are:
1. Why should a prospective customer buy your product or service rather than a competitor’s?
2. Is there a segment of the market that values what differentiates your offering and is it large enough to support your business?
3. How will you reach this segment with your marketing message?
Every business, no matter how large or small must answer these three questions, either implicitly or explicitly. However, once you resolve these very basic issues, whether you need a formal business plan is a function of cash flow. If your business will have significant negative cash flow before it starts to throw off cash, or if you need your business to throw off cash from day one (for example, to pay the bills), a formal business plan may be in order.
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Let’s consider examples at each end of the spectrum. You have an idea for a fantastic new product. You want to launch a business to bring the product to market. However, you’ll need to make a significant investment in product development. Then, you’ll need to purchase equipment, rent space, and hire people to manufacturer it. There will be a lot of cash outflow before there is any income. You’re looking for investors to help make your dream a reality. You are going to need a formal business plan.
At the other end of the spectrum, suppose you want to launch a business that has no fixed cost. No upfront investment is required. You’ll be cash flow positive from day one. Further, let’s assume that you are not counting on income from this new venture to pay your monthly bills.
An example might be a residential cleaning business. You’ll use the customer’s equipment and supplies. You have already had two prospective customers approach you about cleaning their homes. You know that a large number of working people in your area use housekeepers, so there is a good market. Your prices are competitive and you consistently do a better job than the franchise cleaners do. Therefore, you expect that your business will grow through word of mouth.
You certainly have a plan for your business. You’ve answered the three questions every business must answer. However, we would not encourage you to hire a consultant to help you develop a formal business plan with revenue, expense, and cash flow projections. Instead, test and learn. Fail fast and fail cheap. Learn from your mistake and move on.
Most businesses fall between these two extremes described above. The key to whether or not you will want to invest the time and effort to develop a formal business plan is your cash flow situation. If you are looking for outside funding or you are going to dig a deep whole before you become cash flow positive, invest the time to develop a formal business plan. If you will be cash flow positive from day one, answer the three questions above and get on with your business.
Doug and Polly White have a large ownership stake in Gather, a company that designs, builds and operates collaborative workspaces. Polly’s focus is on human resources, people management and human systems. Doug’s areas of expertise are business strategy, operations and finance.