It’s easy to jump into a small business startup thanks to the internet. Those with an entrepreneurial spirit and a will to succeed can develop a website using simple-to-use free website builder and be in business in a short period of time.
Starting a new home-based business on a dime, so to speak, may sound appealing, but there is the danger the entrepreneur will skip critical business steps that help the business get grounded, grow, and succeed over time. One of those steps is the formal business plan.
There are plenty of people writing articles claiming the business plan is passé. They are wrong, and following are five solid reasons why every business – even the home-based business – needs a business plan.
1. Answer Critical Questions
Developing a business plan forces the entrepreneur to thoughtfully answer a lot of important questions before starting the business. Ernst and Young and the Economic Innovation Group conducted a survey of millennials and found that 62 percent of millennials have thought about starting a business, and many don’t follow through because of personal financial issues.
In fact, 63 percent of those surveyed said they would have difficulty covering an unexpected $500 expense. A complete business plan walks the would-be entrepreneur through important issues that have a direct bearing on the entrepreneur’s personal life. How much are startup expenses? Is it necessary to purchase inventory? Will you work part-time or full-time on the business?
You also need to ask yourself personal questions. For example, can you afford to pay your living expenses during the early stage of the startup? If you have very little money in the bank, you may not be able to start a full-time home-based business, but your business plan can address steady growth.
What would happen if customer demand exceeds all expectations and you are unable to keep pace with order fulfillment? Can you quickly find a backup source of money? Note that investors and banks require an investor business plan, unless borrowing from friends and family.
2. Keep Business Activities Aligned with the Mission
Every business needs a mission statement because it captures what the business is all about. Writing the statement encourages you to condense the business into a few succinct sentences and eliminate the fluff.
You may want to start the most amazing home-based craft business, but what will make it so amazing? Is it the unique craft supplies sold to do-it-yourself people or innovative finished products sold to retail stores? What drove you to start a business and what is the overriding goal?
A lot of information is contained in the mission statement, but the final statement becomes the foundation for continued success. Every decision you make from that point on should be aligned with the mission.
For example, you want to wow the marketplace with innovative craft supplies, but an opportunity comes up to add non-craft items to the product line. With eyes on the mission statement, you decide to turn down the opportunity because it is simply not a good fit and would become a distraction.
3. Adhere to Solid Business Principles
There is a set of principles and activities that every business must address in order to succeed. Even the one-person home-based business must develop a mission, identify the staff (which could be just you!), describe its customers, identify the market, develop a marketing system, determine an operational plan, and develop a financial plan.
Jumping into a business feet first without a business plan is likely to mean you do not consider all the activities so important to starting, managing, and keeping alive a business.
Alex Silensky, founder and owner of OGS Capital, has helped thousands of entrepreneurs develop business plans. Through experience he has learned that people who develop business plans will also “walk the walk” of market research and identify success factors. “Skipping steps in the belief the business is too small to worry about things like market research can leave the home-based entrepreneur wondering why it is so difficult to convert leads to sales. It is often because the marketing plan does not match the targeted market.”
4. Identify Risks
You are not planning on failing when you start a home-based business. Yet, there are always risks. It is tempting to think that risk management is not applicable to a small business started on the proverbial dime. That is not the thinking of a successful businessperson.
The Small Business Administration developed a very useful guide on risk management with exercises to help you identify the internal and external risks specific to your small business. Once identified, those risks are addressed in the business plan. However, the business plan and risk assessment go hand-in-hand. How do you know competitors present risks if you have not researched the business environment? Based on the five-year proforma financial statements in the business plan, what are the risks associated with too few customers or sales leads, slow cash flow, or unexpected expenses (such as your rent or utilities increase)?
5. “Meet” Your Customer
You have a great idea for a new business and could have a website up and running within a couple of days. However, do you know exactly who your customers will be? What are their demographics? Does the website appeal to the targeted market? How will you reach the market so potential customers know you are open for business? Are there competitors also competing for the same customers, and if so, what are their strengths and weaknesses.
A portion of a business plan is dedicated to describing customer demographics, and that description influences the marketing plan, such as website design, promotions, pricing, and advertising. Sitting on your couch and saying, “I think I will sell to moms,” is only a start. You need to create an imaginary ideal customer that you know a lot about, such as education level, gender, employment status, age, income, geographic area, and unmet needs. Is the ideal customer a stay-at-home mom, employed, and/or active in the community? Is she under the age of 30 or is she an older mother? Does she typically have more than one child?
Customer psychographics are also important to identify. They include the customer’s values, personality, attitudes, beliefs, and lifestyle. For example, you plan on selling through the internet. Do you know the demographics of people who regularly use the internet to shop for the kind of services or products you will sell?
This information helps you “see” the customer as a person, so you can keep products and services, and marketing, aligned with their preferences. With demographics and psychographics identified, you can now ask: What is the problem she encounters for which your products or services will offer a solution?
Millions of people are starting home-based businesses, and many will fail due to lack of planning. You can be one of the success stories by exercising some patience and taking the time to develop a quality business plan. Ask and answer the right questions up front, get your business on solid footing from day one, and watch it grow.