“What does not get measured, does not get done”. I recently heard this statement, and it has struck a chord. How often, do we all think about things, plan (in our heads) and start executing ad-hoc? This holds as true for our personal lives as it is for our businesses – and in business, it can have a very far-reaching impact. Broadly, there are three main reasons why one may need a business plan – for your company strategy, for your bank loan or for an investor.
What happens if you don’t have a formal plan?
It may seem like you don’t need a formal business plan written up until someone asks you for it. However, when someone does in fact ask for it, and you do not have one, that’s when the chaos begins. Because, very likely, mistakes will have been made in execution. Expenses may have been made from accounts not linked to the company, money from personal sources may have been used in the company, etc. Or the “plan” in mind during a verbal conversation, may not add up with the plan seen on paper. When you scramble, you use band-aid solutions for large problems and that’s where skeletons start to build in closets. At some point, those very closets are always opened – and you may be scrambling again.
What about loans?
Banks follow a low-risk strategy – what does that mean for you? It means that you need to show that your business is low risk. Your riskiness is linked with a higher interest payment, something no one wants. How do you avoid that? With a prepared plan prior to execution. So that, risks are foreseen, minimized, and fixed in timely manners. The more band aids you seem to have used, the higher your risk profile becomes. This is assuming you meet the basic requirements of stable income, low debt, repayment capacity etc. Whether you need the loan for an expansion, new machinery or to meet working capital requirements, bankers assign risks and lend based on the entrepreneur as much as they base it on meeting laid down listed criteria. Minimize your entrepreneur risk by planning and creating an honest business plan.
And finally, what happens with equity investors?
If you think you may ever want equity investors, create a plan as soon as possible. Equity investors are partners and have a right (and obligation) to review the entire history of your company. They will open every single closet that is closed and will find whatever needs to be found. They need to know who they are marrying and leave no stone unturned. So, a planned, measured goal-oriented company, with an honest business plan – that’s the dream. The reality is, if you have a plan, you deviated and then made a new plan, that’s usually fine too. Honestly, disclosures and the willingness to track, measure and recalibrate, that’s what gets the funding usually (apart from the basic idea, market etc.). If you have a patchwork plan, created 6 months before meeting them – they know. It’s not a no-go, just a red flag. Of all the reasons above, the main reason you need a plan is because you need a path to walk on. You need to know where you are going and what you are aiming to reach. The path may change, and the path may bring surprises, but you have the basic guidance and scaffolding it provides. And without scaffolding, debris falls everywhere and usually hits you in an unexpected way. It’s a boring activity, which saves you a lot of future band aids.
This piece was first published in Bahrain this Months September 2023 issue.