The importance of a business plan

January 2, 2022

8 minutes to read

Entrepreneurship

Business plans are like road maps: it’s possible to travel without one, but that will only increase the odds
of getting lost along the way.

Owners with a business plan see growth 30% faster than those without one, and 71% of the fast-
growing companies have business plans. Before we get into the thick of it, let’s define and go over what
a business plan actually is.

What is a business plan?

A business plan is a 15-20 page document that outlines how you will achieve your business objectives
and includes information about your product, marketing strategies, and finances. You should create one
when you’re starting a new business and keep updating it as your business grows.

Rather than putting yourself in a position where you may have to stop and ask for directions or even
circle back and start over, small business owners often use business plans to help guide them. That’s
because they help them see the bigger picture, plan ahead, make important decisions, and improve the
overall likelihood of success.‍

Why is a business plan important?

A well-written business plan is an important tool because it gives entrepreneurs and small business
owners, as well as their employees, the ability to lay out their goals and track their progress as their
business begins to grow. Business planning should be the first thing done when starting a new business.
Business plans are also important for attracting investors so they can determine if your business is on
the right path and worth putting money into.

Business plans typically include detailed information that can help improve your business’s chances of
success, like:
A market analysis: gathering information about factors and conditions that affect your industry

Competitive analysis: evaluating the strengths and weaknesses of your competitors

Customer segmentation: divide your customers into different groups based on specific characteristics to
improve your marketing

Marketing: using your research to advertise your business

Logistics and operations plans: planning and executing the most efficient production process

Cash flow projection: being prepared for how much money is going into and out of your business

An overall path to long-term growth

10 reasons why you need a business plan

I know what you’re thinking: “Do I really need a business plan? It sounds like a lot of work, plus I heard
they’re outdated and I like figuring things out as I go...”.

The answer is: yes, you really do need a business plan! As entrepreneur Kevin J. Donaldson said, “Going
into business without a business plan is like going on a mountain trek without a map or GPS support—
you’ll eventually get lost and starve! Though it may sound tedious and time-consuming, business plans
are critical to starting your business and setting yourself up for success.

To outline the importance of business plans and make the process sound less daunting, here are 10
reasons why you need one for your small business.

1. To help you with critical decisions

The primary importance of a business plan is that they help you make better decisions.
Entrepreneurship is often an endless exercise in decision making and crisis management. Sitting down
and considering all the ramifications of any given decision is a luxury that small businesses can’t always
afford. That’s where a business plan comes in.

Building a business plan allows you to determine the answer to some of the most critical business
decisions ahead of time.
Creating a robust business plan is a forcing function—you have to sit down and think about major
components of your business before you get started, like your marketing strategy and what products
you’ll sell. You answer many tough questions before they arise. And thinking deeply about your core
strategies can also help you understand how those decisions will impact your broader strategy.

2. To iron out the kinks

Putting together a business plan requires entrepreneurs to ask themselves a lot of hard questions and
take the time to come up with well-researched and insightful answers. Even if the document itself were
to disappear as soon as it’s completed, the practice of writing it helps to articulate your vision in realistic
terms and better determine if there are any gaps in your strategy.

3. To avoid the big mistakes

Only about half of small businesses are still around to celebrate their fifth birthday. While there are
many reasons why small businesses fail, many of the most common are purposefully addressed in
business plans.

According to data from CB Insights, some of the most common reasons businesses fail include:

No market need: No one wants what you’re selling.

Lack of capital: Cash flow issues or businesses simply run out of money.

Inadequate team: This underscores the importance of hiring the right people to help you run your
business.

Stiff competition: It’s tough to generate a steady profit when you have a lot of competitors in your
space.

Pricing: Some entrepreneurs price their products or services too high or too low—both scenarios can be
a recipe for disaster.

The exercise of creating a business plan can help you avoid these major mistakes. Whether it’s cash flow
forecasts or a product-market fit analysis, every piece of a business plan can help spot some of those
potentially critical mistakes before they arise. For example, don’t be afraid to scrap an idea you really
loved if it turns out there’s no market need. Be honest with yourself!
Get a jumpstart on your business plan by creating your own cash flow projection.

4. To prove the viability of the business

Many businesses are created out of passion, and while passion can be a great motivator, it’s not a great
proof point.

Planning out exactly how you’re going to turn that vision into a successful business is perhaps the most
important step between concept and reality. Business plans can help you confirm that your grand idea
makes sound business sense.

A graphic showing you a “Business Plan Outline.” There are four sections on the left side: Executive
Summary at the top, Company Description below it, followed by Market Analysis, and lastly Organization
and Management. There was four sections on the right side. At the top: “Service or Product Line.” Below
that, “Marketing and Sales.” Below that, “Funding Request.” And lastly: “Financial Projections.” At the
very bottom below the left and right columns is a section that says “Appendix.

A critical component of your business plan is the market research section. Market research can offer
deep insight into your customers, your competitors, and your chosen industry. Not only can it enlighten
entrepreneurs who are starting up a new business, but it can also better inform existing businesses on
activities like marketing, advertising, and releasing new products or services.

Want to prove there’s a market gap? Here’s how you can get started with market research.

5. To set better objectives and benchmarks

Without a business plan, objectives often become arbitrary, without much rhyme or reason behind
them. Having a business plan can help make those benchmarks more intentional and consequential.
They can also help keep you accountable to your long-term vision and strategy, and gain insights into
how your strategy is (or isn’t) coming together over time.
6. To communicate objectives and benchmarks

Whether you’re managing a team of 100 or a team of two, you can’t always be there to make every
decision yourself. Think of the business plan like a substitute teacher, ready to answer questions any
time there’s an absence. Let your staff know that when in doubt, they can always consult the business
plan to understand the next steps in the event that they can’t get an answer from you directly.

Sharing your business plan with team members also helps ensure that all members are aligned with
what you’re doing, why, and share the same understanding of long-term objectives.

7. To provide a guide for service providers

Small businesses typically employ contractors, freelancers, and other professionals to help them with
tasks like accounting, marketing, legal assistance, and as consultants. Having a business plan in place
allows you to easily share relevant sections with those you rely on to support the organization, while
ensuring everyone is on the same page.

Ready to grow your team? Learn when (and how) to hire a contractor for your business.

8. To secure financing

Did you know you’re 2.5x more likely to get funded if you have a business plan?If you’re planning on
pitching to venture capitalists, borrowing from a bank, or are considering selling your company in the
future, you’re likely going to need a business plan. After all, anyone that’s interested in putting money
into your company is going to want to know it’s in good hands and that it’s viable in the long run.
Business plans are the most effective ways of proving that and are typically a requirement for anyone
seeking outside financing.

Learn what you need to get a small business loan.

9. To better understand the broader landscape

No business is an island, and while you might have a strong handle on everything happening under your
own roof, it’s equally important to understand the market terrain as well. Writing a business plan can go
a long way in helping you better understand your competition and the market you’re operating in more
broadly, illuminate consumer trends and preferences, potential disruptions and other insights that
aren’t always plainly visible.

10. To reduce risk

Entrepreneurship is a risky business, but that risk becomes significantly more manageable once tested
against a well-crafted business plan. Drawing up revenue and expense projections, devising logistics and
operational plans, and understanding the market and competitive landscape can all help reduce the risk
factor from an inherently precarious way to make a living. Having a business plan allows you to leave
less up to chance, make better decisions, and enjoy the clearest possible view of the future of your
company.

Understanding the importance of a business plan

Now that you have a solid grasp on the “why” behind business plans, you can confidently move forward
with creating your own.

Remember that a business plan will grow and evolve along with your business, so it’s an important part
of your whole journey—not just the beginning.