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Why is a Business Plan Useful to an Entrepreneur?

Is a business plan a terrible clumsy monster or an efficient and useful tool? For people without previous business experience, like hair dressers or IT-specialists, the language used in a business plan may seem strange or not understandable. The terrible monster, called a Business Plan, has ended the journeys of some starting entrepreneurs already before they have begun. I have frequently been asked questions like: “Why is all this needed?” or “Do I really need to think of such topics, I have such a simple or unique idea?” A business plan is a mandatory document, when an entrepreneur is asking for financing from a bank or a governmental entrepreneurship support organizations. It is not possible to attract the investors’ attention without providing a detailed overview of your business, among other things. On the other hand, I look at it from the perspective of how can a business plan be beneficial to the entrepreneur. I see it as a flexible tool for analyzing self, the environment and writing down own thoughts in a structured and understandable manner, not as the “Ten Commandments” written in stone. Thus, I find that it is very useful for an entrepreneur to work on his/her business plan by him-/herself and not let anyone else do it for a fee.

A Business or a Hobby?

Difference between a business and a hobby is the direction of cash flow. A hobby takes cash from you and a business brings cash in, at least in theory. The business plan format is suitable for developing a clearer picture for you of how to manage the cash to flow in the desired direction and what are the factors influencing the process. Clearly, a person without business experience might need help in understanding the terminology and guidance on where and how to find data and how to analyze it to find the necessary answers. Furthermore, that person probably needs to learn how to analyze and compare themselves with competitors and to understand “what is the deal with the numbers?” and where they come from and why does he/she even need to consider the figures and ratios. Often it happens that a person gets an idea to offer an existing product or a service with a smaller price. That leads to a question of how is the market price determined. Here again the business plan comes to play in helping to determine whether the initially brilliant idea could actually work in practice. It is true that a business plan does not guarantee success and in starting to apply it you probably need to improvise, find new angles, solve unforeseen problems and make adjustments to the plan. Still, many questions do not arise, as they have already been taken into account during the compilation of the business plan and several scenarios have already been considered.

How is a Price Determined?

In putting the business plan together you analyze yourself and the environment around you carefully, starting with identifying present and necessary skills and knowledge needed for running your business. Even a qualified masseuse needs to find answers to some questions. How to inform potential clients? How do I sell my services? How do I differentiate from other service providers? Why should the clients choose me over the competitors? Do I know how to do marketing and sales or do I need external help? Where do I get such help? How much does it cost? How much time does it take? For example, for people who consider a website to be an important marketing channel, but have never dealt with website creation; lack the idea of what it takes to make a decent website and how much time it takes to produce it. Developing a business plan makes you find that out. An employed masseuse never heeds to think about finding salon space, dealing with rent payments, maintenance costs, different kinds of additional costs and worry about who is registering clients while he/she is serving a client. Starting an own business, it is not easy to come up with all the answers, if you don’t have a structure to think by. I have lectured to long-distance truck drivers for years. They are smart people with an open mind, who are very interesting to talk to. Still many of them often ask the same question: “if my employer gets X euros for the trip, why do I only get a small part of that as salary, although I am the one making that trip and earning that money”.

How to Reach Your Clients?

In addition to the previous, the use of the business plan format helps to find answers to questions like how to attract clients’ attention and differ from other product/service providers. Finding out about competitors and getting to know them may help to clarify the picture on the market you are thinking about entering. You may learn from competitors what and how to do and also what to definitely avoid.

Client chooses a provider who he/she knows and who they can rely upon. In introducing oneself, you need to know yourself and also consider who you are meeting with. Making a business plan helps to clarify, which types of clients you are looking for, how many of such are likely to exist, where they are located and how it is easiest to let them know that you exist. Once your client group is clearly defined, it is easier to find suitable ways of reaching them. If your product or service is meant for all healthy people around the world, how do you communicate it to the target group? Reaching a 19-year-old European takes different channels and a different language than reaching a 75-year-old habitant of a tribal Siberian village. It is also worth to think about how much time, attention and money it is wise to spend on each target group considering how much revenue that group is likely to generate. A business plan is a convenient way to define target client groups.

Why Should You Analyze Risks?

In my previous post I used an example of a businessman, who claimed he doesn’t plan anything. Not even a trip from one city to another. In analyzing his claim it was clarified that he had a clear idea of how, with how much costs and how much time it would take him to travel from point A to point B. furthermore, he had considered possible risks and alternative options for a situation when, for some reason, the chosen bus would not depart or anything happened to it along the way. Some clients without prior business experience have asked about risks and their questions have arisen from the business plan format. In a business plan it is usually asked to describe business risks and also steps taken to mitigate or eliminate those risks. You could think about the usefulness of identifying risks in business. Why for example insurance companies and credit institutions investigate the clients’ backgrounds so thoroughly? Or why do some companies offer the services of cargo insurance?

 

I hope that the previously described examples of the usefulness of a business plan to the entrepreneur will encourage trying those, who have so far been reluctant or have written the business plan for someone else. It is in some cases useful to make a business plan “look better” so that it meets some requirements, but when an entrepreneur is giving up the opportunity of developing a business plan as a tool for self-analysis, he/she or his/her company would not get any benefit from the process. Next time we will be writing about business models and their creation. A business model is a handy visual tool, which makes the business plan development process more fun and which can be used in planning and analyzing business processes.

Mari Kuljus

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