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Why is a business plan so important?

25/05/2017 by Pascoe Partners Accountants

Why is a business plan so important?

Some small business owners surprise me with their attitude towards business plans: “Why is a business plan so important? I have all the info I need in my head or on my desk.”

Yes, they have actually said that to me!

Usually I ask them this:

“When you’re going on a trip, do you use a GPS or Google Maps for direction?”

They answer “yes,” of course.

“Well, a business plan is Google Maps for your business,” I say.

I am not trying to be funny in my response: small businesses need a business plan or budget for the year ahead just as much as a driver needs GPS to get them where they want to go.

Without GPS, they may be able to muddle through – but it will cost them precious time, expense, and sanity! The same applies to business plans!

The importance of a business plan

A business plan is important because it can map out where you want your business to be in 12 months, two years, or even five years.

Now is an appropriate time to sit down and make this plan – either alone or with an advisor. Not sure where to start?

A quick Google search and you’ll find the website, which provides a template and a guide to completing a business plan. There is no need to drill down into as much complexity as the template, but working through it could be a good way to get focused on the business.

If you are going it alone, it’s best to find somewhere quiet and away from your business and home, so you don’t get distracted.

What key data is in a business plan?

A simple but effective business plan should include a cash flow budget for the following year.

There are many software programs designed for this purpose but you can equally use a simple spreadsheet (which we can provide). This is usually sufficient for a small business.

Start by entering your current year’s figures. Make sure you are up to date with processing this data, as bad data leads to bad decisions.

Then add cash flow forecasts for the year ahead. This is the most important part of a business plan as it will help you decide expectations and targets.

But, once completed, don’t just pat yourself on the back and leave your business plan on the shelf.

Just like you need to follow the directions of the GPS, which may change depending on traffic conditions, you need to be held accountable to the numbers, and these may also change.

This means that you must regularly review your actual numbers and compare them to the forecasts. The key again here is accurate and timely data and it’s where the true importance of a business plan is revealed.

The true importance of the business plan

No one is going to penalise you for not achieving the budget forecasts. They are only educated guesses at the best of times. However, you will find that, over time, you will get more accurate with the forecasts, if you are paying more attention to your business.

Comparing the budgeted figures to the actual figures is where the business plan starts to come into its own and provide valuable direction.

These figures can provide warnings of problems that may eventuate in the future and encourage you to be proactive in avoiding the pitfalls.

For example, if you are not meeting sales targets, it could mean that cash flow will be a problem in the following month, if you provide 30 days credit. You have the option then of trying to reduce costs or maybe getting a temporary increase in overdraft facilities to cover the shortfall.

Generally, bankers look more favourably on businesses that can demonstrate sound practices and have a knowledge of where they are at. This means having a solid business plan in front of you.

Struggling to create a business plan?

We are able to assist you with developing a business plan that provides important ongoing direction for your business.

This can include everything from completing a simple spreadsheet and reviewing your current year’s data, to hosting a regular accountability meeting to review your actual budget performance.

Just like with GPS for drivers, unless you stay focused on the direction ahead, you will not make your destination. If you’d like some help to ensure you do end up in the right place, contact us now for assistance.