The Benefits of Creating a Business Plan?

Influences of an effective business plan

When based on the foundation of a fully developed and tested business model, a well-conceived
and factually based business plan increases the likelihood of success of a new business. For
decades, research has proved that companies that engage in business planning outperform those
that do not. One study by the Small Business Administration reports that entrepreneurs who write
business plans early on are two-and-a-half times more likely to actually start their businesses
than those who do not.2 Unfortunately, many entrepreneurs never take the time to engage in the
new business planning process, of which the business plan is an important element. The implications
of the lack of planning are all too evident in the high failure rates that small companies
experience.

Component of a good business plan

What is business plan

A business plan is a written summary of an entrepreneur’s proposed business venture, its
operational and financial details, its marketing opportunities and strategy, and its managers’ skills
and abilities. There is no substitute for a well-prepared business plan, and there are no shortcuts
to creating one. The plan serves as an entrepreneur’s road map on the journey toward building
a successful business. A business plan describes which direction the company is taking, what
its goals are, where it wants to be, and how it intends to get there. The plan is written proof
that an entrepreneur has performed the necessary research, has studied the business opportunity
adequately, and is prepared to capitalize on it with a sound business model. Crafting a business
plan is an entrepreneur’s last insurance against launching a business destined to fail or mismanaging
a potentially successful company.




To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and
investors:
 (1) the reality test,
 (2) the competitive test,
 (3) the value test. The first two tests
have both an external and internal component:

REALITY TEST

 The external component of the reality test involves proving that a market for the
product or service really does exist. It focuses on industry attractiveness, market niches, potential
customers, market size, degree of competition, and similar factors. Entrepreneurs who pass this part
of the reality test prove in the marketing portion of their business plans that there is strong demand
for their business idea. Evidence that is gathered during the testing of the business model should
be an integral part of the marketing plan to bolster the proof for the idea using real customers.
The internal component of the reality test focuses on the product or service itself. Can the
company really build it for the cost estimates in the business plan? Is it truly different from what
competitors are already selling? Does it offer customers something of value?

COMPETITIVE TEST 

The external part of the competitive test evaluates the company’s relative
position to its key competitors. How do the company’s strengths and weaknesses match up with
those of the competition? Do these reactions threaten the new company’s success and survival?
Recall from Chapter 4 that a compelling value proposition must clearly define the problem the target
market is facing. Are current choices to address the problem for target market unworkable? Is some
sort of solution for the problem facing the target market inevitable? Is the problem urgent, critical,
and clear for the target market? Is the target market underserved? Successful entrepreneurs carefully
and honestly evaluate the strength of their product ideas. Do we offer a solution that looks at the
problem differently than competitors? Can we protect our intellectual property (if applicable) and/
or create a protect able niche? Do we disrupt the market but not so much that the “cost” of changing
to us is too high? A value proposition that is properly constructed answers the following questions:4
● Who is our target market?
● What current options exist for this target market?
● What do/will we offer the target market?
● What is the key problem it solves?
● Why is it better than other options the target market has to choose from?

VALUE TEST

 To convince lenders and investors to put their money into the venture, a business
plan must prove to them that it offers a high probability of repayment or an attractive rate of
return. Entrepreneurs usually see their businesses as good investments because they consider the
intangibles of owning a business, such as gaining control over their own destinies and freedom
to do what they enjoy. Lenders and investors, however, look at a venture in colder terms: dollarfor-
dollar returns. A plan must convince lenders they will be repaid the money they lend to the
business, and it must convince investors they will earn an attractive return on their money.
Even after completing a feasibility analysis and building a business model, entrepreneurs
sometimes do not come to the realization that “this business just won’t work” until they build a
business plan. Have they wasted valuable time? Not at all! The time to find out that a business
idea will not succeed is in the planning stages before committing significant money, time, and
effort to the venture. It is much less expensive to make mistakes on paper than in reality. In other
cases, a business plan reveals important problems to overcome before launching a company.
Exposing these flaws and then addressing them enhances the chances of a venture’s success.
Business plans also help nascent entrepreneurs nail down important aspects of their concept and
sometimes prevent costly mistakes.