Business Planning 101—A Primer on assembling the most important document of your business, the business plan.
Why a business plan is needed to start a business
Okay—the first thing you have to understand about making a business plan why it is important to make one in the first place. The most important and prevalent reason people make a business plan is simply because they have enough money to bring their business idea into fruition themselves. Therefore, they must convince someone that their business idea is good enough that it will not only make money, but make enough money to pay back whatever the money the person gives you plus a hefty amount of interest.
There are many people from which you may get money to start your business typically these include:
· Family and Friends—In the form of a gift, a loan, or stock (partial ownership in the business)
· Banks—in the form of a loan with a fixed amount of interest.
· The Government—In the form of loans, or grants. Typically a lot of paperwork and bureaucracy.
· Venture Capitalists—in the form of loans, or stock. Venture capitalists are companies whose sole purpose is to go around finding the next great business idea and throw money at it.
· Angel Investors—in the form of loans, or stock. Angel investors are individuals with a lot of money to burn looking for the same thing as venture capitalists. Generally these people are hard to find.
There are positives and negatives with obtaining funding for your business each of these entities. For instance, if any of your family or friends has extra cash, this may be the easiest way to get start-up capital (cash, or other assets), but there is a chance that the business arrangement might get in the way of your personal relationship. In this case it is very important to formalize the business arrangement, to the greatest extent feasible, to deflect any future problems you may have paying back the loan or providing a good return on their investment from your personal relationship.
It is important to note that even if you have the greatest business idea since google, and put together the greatest, most polished business plan, and you sell it better than Donald Trump sells real estate, there is a 95% chance that you will have to ante up some of your own money in to the business. This is especially true with banks. Just like a mortgage they are looking for you to put your own money in before they give you a loan. Injecting your own capital also helps the financial projections you will make in the business plan, but we will get in to that more later on.
The other reason that people create business plans is to organize all of the ideas of their business in to one document. This reason for creating a business plan I feel is equally as important as trying to get money, and is many times overlooked. Ideas may sound good in your head, but once they get down on paper sometimes they lose their luster. Likewise, as you start to organize your ideas on paper, you will quickly realize that there are many things and details associated with starting up a business that you had not previously thought of. For instance, you may have a very good idea of where your business is going to be located, or how you are going to sell your product to customers and how much you are going to charge, but have do you need employees? If so, how many do you need, and how are you going to train them and how much will they get paid? A business plan will essentially build a roadmap for you to start-up your business in an organized way allowing you to focus on running the business, rather than having to make a thousand little decisions that should have been addressed prior to you opening up for business.
Next Section: The main parts of a business plan…