The importance of planning can not be underestimated in driving small business success
Dr. Graeme Edwards once said it’s not the plan that’s not important, it’s the planning. Part one of a two part series.
Throughout the lifecycle of a company most will find themselves at a critical stage where they are in between that of survival and success. Privy to companies that successfully navigate their way through this stage is that of their ability to properly plan.
Why is planning such a critical requisite for a small company at this stage?
A major reason is that smaller companies at this stage tend to have limited access to capital along with a predisposed margin for error that is either little or non-existent. Unlike larger companies which have greater access to capital and can sometimes afford to make mistakes and/or operate with a greater level of inefficiency; smaller companies can’t afford these mishaps and therefore must dedicate ample time towards developing a strong plan.
Proper planning forces companies to chart the future and develop acclimation strategies for potential negative anomalies. As a result, companies increase their ability to identify and correct mistakes and/or operational inefficiencies before endeavors go too far.
Planning facilitates strategies with realistic expectations
Planning allows for companies to establish realistic expectations and formulate strategies that fit their individual scope of reality. More often than not small companies will have an idea of what their goals are but fail to price in the realities associated. Classic examples of such behavior are over optimistic revenue forecasts, underestimation of capital requirements, failure to understand target markets, and the assumption that the company can take on more business and operate at the same level of efficiency, etc.
Companies that properly plan will take into account all aspects of their business as well as the variables that pose the greatest risk. The key take away is that planning allows companies to become more adaptive and responsive when unforeseen problems arise.
Planning establishes accountability
Review and planning establishes accountability amongst owners and employees. For small companies, planning allows for owners and employees to get together and assign specific tasks and roles to each other. With accountability established employees not only have a clear understanding of what their responsibilities are, they also gain a sense of purpose within the company; which in turn can lead to increased morale. Neglecting to establish accountability can cause confusion amongst employees as to what their responsibilities really are, thereby resulting in a disorganized company without a clear vision.
Planning can increase access to capital
A well thought out plan can provide companies with increased access to capital. The planning process provides companies with information on the requirements to obtain funding, such as having properly prepared financial statements and certain financial metrics. Like any investment or loan, investors and lenders bear the risk of default and losing all of their money.
When risk is high lenders and investors will require unfavorable return rates, or disbar the proposal all together. Unlike larger companies, smaller companies are automatically perceived by banks and investors as very risky due to the large amount of uncertainty related to idiosyncratic and external factors. By bearing this defaulted perception of risk small companies need to find an edge wherever possible.
A sound plan will provide banks and/or investors with extensive details on what the capital requirements are; how the capital will be utilized; information on current and future risk factors; and financial statements. As a result, capital providers will be able to gain better understanding of the business, thereby potentially opening up more financing options.
Adding up the benefits of small business planning equals a path to success. Conversely failure to plan can negatively impact business vitality and growth.
In part two of this series we’ll look at how to properly execute a plan…after all a plan that can not be executed is not really a plan.
This piece was co-authored by Greg Devaux.
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