Business planning is a well-documented subject with thousands of books available on writing the most effective business plan. You can either write a business plan yourself or hire a consultant to do the job.
But given the rapid pace of change in today’s business environment, are business plans as relevant as they used to be?
A somewhat dated but relevant survey of Inc 500 founders in 2002 revealed the following:
- Only 40 percent of enterprise founders had written a formal business plan before starting
- Of these 65 percent deviated from the initial plan
- Only 12 percent of the Inc 500 founders had done some sort of market research before starting their company
Incidentally, these results were consistent with a survey of Inc 500 founders in 1989 confirming that business planning did not necessarily translate to business success.
William Hsu, co-founder and managing partner at start-up accelerator had this to say in an interview to Inc. on relevance of business plans, “We look for three things in a potential start-up: market, team, and concept. The team is by far the most important element, and the second is market. The idea itself is the least important.”
So with factors such as the right team and timing the market gaining precedence, how can new-businesses benefit from a well-documented business plan?
Pros of a Business Plan
Even the naysayers will agree that a business plan is a prerequisite for raising capital from banks and venture capitalists. A comprehensive business plan will help you answer questions that potential investors might have and give them the confidence that you have really ‘thought things through’. The document also becomes the basis for consultation with industry experts.
A business plan is useful for identifying potential roadblocks and defining timelines for implementation. Plotting numbers on paper puts things in perspective.
Once the business idea is put into action, the owner is often required to multitask and can lose sight of the initial ideas for expansion. A business plan serves as a valuable tool for tracking progress against planned initiatives, which is especially significant when you need to repay borrowed capital.
Itai Sadan, Co-founder & CEO DudaMobile (they help small and medium businesses create mobile-friendly websites) says, “I always found that a business plan was more for myself than for external investors. Working on it gave me the ability to withdraw myself from day-to-day tactical stuff and look at my business from a 10,000 foot view and make sure that I understand my market, what problem we are solving, and how we plan to make money. We started DudaMobile over 4 years ago, since then we have grown to over 5 million customers, raised over $18 million and when I look at that first business plan I created, the underlying assumption are still aligned pretty well with our business reality today.”
Ron Daniel CEO of PlanetSoho (which also provides business planning tools) agrees. He says,“Business plans are relevant and will always stay relevant. True, it is becoming harder and harder to predict how a new business will behave over the first years, but the main objective of a good business plan is not to predict anything but to give the thinking tools of all possible variables one must consider when launching a business.”
Cons of a Business Plan
Detractors contend that business plans by their very nature are contrary to an entrepreneurial approach i.e. being able to learn from experience and adapt to change. Basing all decisions on a business plan may actually lead to paralysis by analysis.
Again Ron Daniel says, “A good business plan is like the business ‘user manual’ it shows where to go, what elements to consider etc., it shouldn’t be a fixed course of action in any scenario”.
Today’s business environment requires that opportunities be seized and entrepreneurs can learn more from launching their product/ service and garnering real life customer feedback, than spending several months evaluating if they have a sound business idea.
Hsu says, “One out of every 30 venture start-ups succeeds–and that’s after getting funded. What that means is that entrepreneurs need to take a product to market as fast as they can in any form, even if it’s 10% of the original vision. They have to test it to see if it’s a market fit, if it resonates with customers, and is something they’d eventually pay for.”
A business plan should not take more than 3 to 4 weeks. Business planning software such as PaloAltoSoftware and BizPlan.com can significantly reduce the time it takes to format an investor-ready business plan.
Do you agree that business plans are important but entrepreneurs should not spend excessive amounts of time perfecting them? Please share your opinion in the comments box below.