Thou Shalt Not Operate Without a Business Plan
These days it is considered almost sacrilegious for entrepreneurs to question the importance of having a business plan. Creating this document can benefit a business, sometimes even a great deal, but too often it is pushed as some type of magical panacea. The reality is that life hardly ever goes as expected. It’s also a fact that for many businesses, this ‘must-have’ plan serves little more than a decorative purpose.
Is ‘Business Plan’ a Noun or a Verb?
When experts speak about the importance of having a business plan, they are usually referring to it as a noun rather than a verb. They are talking about a formal document that is written using a clear structure and containing certain elements. In reality, every entrepreneur has a business plan in the verb sense - even if it is vague, unrealistic, and a bit muddled.
How Important is a Business Plan?
“It’s not enough to just show up. You will have to have a business plan”
There are lots of businesses that have achieved great initial success without a formal business plan. Research carried out by Professor William Bygrave (Babson College) failed to find any difference in the success rates of those business that started with a formal plan and those that didn’t. There is also plenty of anecdotal evidence - neither Bill Gates nor Steve Jobs initially benefited from one of these documents, and they both did rather well for themselves. A cynic might wonder if the people who make the most money out of the business plan are those who write ‘how to’ guides or give seminars on the topic.
It is not hard to find evidence that contradicts the claim that a new business must have a formal plan to be successful. This doesn’t mean that creating such a document is a waste of time, but it is important to have realistic expectations of what it can achieve.
The problem is too many entrepreneurs approach this task with a sense of obligation rather than a clear idea of what they are trying to do with it – in other words, they have no plan for how they are going to use their plan. In this situation, it is more likely that this document is going to wind up gathering dust in a drawer somewhere.
So why bother with a business plan at all? Having this tool is no guarantee of anything, but it can increase the likelihood of being successful. It also shows that a new business owner is serious. There are lots of people who talk about starting up their own company, but they never get beyond the talking stage. When people go to the trouble of creating a formal plan, they are more likely to actually take action to turn this dream into a reality.
The Real Benefits of Having a Business Plan
Creating a business plan may be little more than ‘busy-work’ unless there is a clear reason for doing it. The most common motivation is to have something to show potential investors – it looks professional, and it is becoming increasingly difficult to borrow money without it. If the business plan is designed purely to impress other people, though it’s probably not going to have much value as a tool to help a company achieve success.
The real benefit of having a business plan is that it provides a blueprint for action. It also encourages the entrepreneur to think more clearly about what it is that she/he is trying to achieve. This vision is important because it creates a sense of purpose and is something to measure progress against. The document also contains concrete steps for achieving this goal as well as some (hopefully) reliable predictions.
One of the other great benefits of creating a formal plan is that it makes it easier to spot potential problems. Too many new enterprises end up going bust within the first couple of years because of a failure to accurately predict start-up costs. Writing everything down in a structured way can be very revealing – it is too easy to underestimate expenses when just ploughing ahead.
The real key to achieving greatness in the marketplace is to understand the customer. A properly crafted business plan is going to include information and analysis about potential customers, and this can make it easier to create an effective marketing strategy.
The Dark Side of Business Plans
Much of the advice on creating business plans comes from the world of academia – often from experts who have no real history of success as entrepreneurs. This helps to explain why it can feel more like a complicated high school assignment than an effective business tool. There is a whole industry that has grown around this “vital requirement” for any self-respecting business owner. Experts spend too much time on the ‘dos and don’ts’ of creating this document and not enough time on the why.
One of the most worrying trends in the world of business planning is the idea that more is better. This has led some companies to create documents containing hundreds of pages – thus making the plan practically useless because nobody is going to have the time to read it. It wouldn’t be so bad if these documents only contained useful information, but it is just too tempting to beef them up with lots of fluff.
The other danger with business plans is that the desire to be precise can actually lead to poorer predictions. This is because the desire for accuracy gives a false sense of confidence. A business that makes ‘approximate predictions’ has more wiggle-room, and this means there is less risk of being caught off-guard when things don’t work out as expected.
Modern business schools put a great deal of emphasis on teaching students how to create carefully crafted business plans. This type of skill is likely to be helpful in the future, but it could be argued that too much emphasis is put on this activity. In the real world, it is tenacity and the hunger to win that drives people to achieve greatness, and not the ability to create a nicely-structured business plan.
The Most Important Business Planning Advice You Hardly Ever Hear
People shouldn’t feel guilty about not having a formal business plan. The document is probably going to be useless unless there is a good reason for creating it. It’s far more important that an entrepreneur has a clear vision and the heart to take the action that is going to lead to success. It takes time and effort to create a business plan, so it’s not really worth bothering with unless there is an obvious benefit for doing so.
Once an entrepreneur has a clear motive for creating a business plan, it’s important to make sure it is done right. There are plenty of useful books and online tutorials for this, but there is no need to follow any instructions exactly. The whole purpose of this document is to serve the needs of the person creating it. It is important to avoid adding anything that is not going to be used because it just diminishes the usefulness of this tool.
It is also important to keep in mind that a business plan needs to be an evolving process – it needs to change to meet the changing needs of a company. It is rare that things work out exactly as planned, so it is important to update this document regularly – at least every six months.