Does Every Startup Need a Formal Business Plan?

May 16, 2016

 

Q.  I’m just starting my small business. A consultant I met told me that I should have a business plan. What do you think?

 

A. 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 you and is it large enough to support your business?

  3. How will you reach this segment with our message?

Every business, no matter how large or small, must answer these three questions. 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 (say to pay the bills), a formal business plan may be in order.

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.

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