Do I need a business plan to start my own business?

No.

Do not like that answer? Then write one. But write the RIGHT plan for your business. To do this, consider your goal for your plan.

The strategy plan

The purpose of this type of plan is to help you (the entrepreneur and new business owner) define your business strategy. It will be read by you and your team. This kind of business plan you DO need, but I am hesitant to call it a business plan since the words “business plan” carry a certain image. Instead, I like to call this type of plan a “passion to profits plan.” This type of plan should indeed be written. However, it can be written on anything from a napkin to a word processor. This plan should define the following.

– Who is your business? What do you do? How do you help people?

Example: In our AskDrCallahan business we help homeschoolers prepare for college and life.

– How will you make money? Sounds simple, but I am amazed at the number of people who have no real idea on how to do this.

Example: In our case, we sell educational materials for the student and the parent and provide coaching/consulting services.

– Who is your competition?

Example: AskDrCallahan’s primary competition is the providers of high school math curriculum, junior colleges, and other publishers that market to the homeschool segment.

– What sets you apart from the competition?

Example: AskDrCallahan is led by a college professor of engineering (me) who understands clearly what the college expects for a demanding curriculum. In addition, I understand what the job market offers after college. So we provide material that is truly preparing for college and life (we take the long view) instead of how to just get a math credit this year. One other thing that sets us apart – customer/client service. We support our products and our philosophy – even if it means recommending a competitor.

– Size of the market. This is the number of people who are actively buying products like yours.

Example: AskDrCallahan serves the homeschool market, which is a bout 2 Million people in the US. (International figures are just too hard to get). We then pair this down figuring that about ½ of those put their kids back into public/private schools for high school, and ½ of these again really are looking for college credit courses. This gives us a market size of 500,000 potential customers.

– Financial projections / goals. These vary widely – but think through where you want to be in the next year. So if you want to make $100,000 next year, how many widgets will you have to sell? How many customers will you need to interact with to make that happen? (You can assume 5% of the people who see your product might buy.)

Example: AskDrCallahan planned year one goal of $10,000 profit. Using that goal, we figured we needed to sell sell 50+ units , given that our average sell was $200. (Note that our internal costs were VERY low – so we basically neglected expenses). To get 50 units sold, we needed to get in front of 1000 potential customers. If you look at these numbers and think it is not worth it to make $10,000, then think about this – few companies make a profit the first year. We exceeded our goal and have grown ever since. I am not defending our business goals, instead I am trying to help you get a realistic picture of things.  A business is not a sprint – it is a marathon. That first $10,000 of profit was hard work – the next $100,000 in profit was much easier. It is a game of momentum.

I hope you can see from the above that a plan for YOU need not be long, but answers to these deceptively simple questions can do a lot to destroy false assumptions and can help you determine what you need to do. I find many startups (even the ones trying to raise venture capital) cannot answer the questions above – so they have no idea of where they are going.

WARNING: Your plan is wrong. Be forewarned that your “passions to profits” plan is not going to be accurate. As you start to interact with customers and move product – you will learn that some of your assumptions were wrong. This is normal –  and in fact exciting. Roll with it – but do not use this as an excuse NOT to plan.

The plan to get a business loan

Before we talk about this plan, please note – for a small business there is no such thing as a “business loan” – it is a personal loan. I do not care what the bank calls it, they are loaning the money to you and expect YOU to pay it back.

Now, if you are writing a plan because you are after a loan and the bank requires a plan – then write one. But be aware, they are not going to read it. So do not kill yourself. Just write down the information above, put in a nice written and printable form, and give it to them. They will likely want 1-5 year projections of your profits – so make them up. Remember, banks are not investing in your business – they are loaning you money – so all they need the plan for is to have it on file. I would expect this plan to take no more than 10 pages, 5 is better. If it takes more, you are wasting your time.

Plans to raise investment capital

Now if you are trying to raise investment capital, either angel or venture capital (VC), then you will need a plan – sooner or later. (If you do not know what Angel or VC is, then just skip this section – you do not care.) But, I would wait. In fact, I would get the investor to help me write it. If you have some kind of crazy idea that you can write an outstanding plan, submit it to VC or some online forum or contest and get funding – you are an idiot. (OK- so it can happen – but go ahead and play the lottery just to increase your odds.)

Angel and VCs invest money in relationships. So your best bet is to be out there talking to these people, seeking their counsel, sharing your ideas. If they immediately ask for a plan and say they will get back to you – that is a kiss off. Instead you want to talk to these people about your ideas, ask them who else you should talk to – and keep plugging away. If they like you and are intrigued – they will help guide you along. If they do not, you are wasting you time anyway.

Note that very few businesses get funding from investors. Very few – about 0.1% – if that high. So unless you fit the criteria for an investment deal (we can talk more on that later – but just assume you do not) then forget it. Go make money.

I hope this helps – and I hope many of you will spend the next hour sketching your plan with pen and paper and the hours after that making money. But, I know, some of you will go with the conventional wisdom and spend a considerable amount of time writing a detailed business plan. In fact, I fully expect some of you to spend months on a nicely polished plan. So for those of you who do like the academics say and write the plan anyway – because your professor or someone in SCORE told you to do, take comfort that if you circulate it well and get it noticed – it will be read. The problem is, it will only be read by MBA students – who have no money to invest or expertise to offer. But you will be contributing to the education of another set of MBAs.