Writing a business plan has always been synonymous with entrepreneurship, largely because they act as a bridge between entrepreneurs and investors. The primary function of a business plan is to outline an investment opportunity, so a prospective investor has the required information they need to assess its attractiveness.
However, this is not the sole purpose of a business plan. They can also benefit entrepreneurs well beyond this narrow interpretation, helping them to manage cash flow, to set goals and milestones, to prioritise tasks and in helping them to deal with uncertainty.
However, an increasing number of entrepreneurs are eschewing business plans for a whole host of reasons, which are ultimately to their detriment.
Let’s look at some of the excuses entrepreneurs come up with.
1. They are bootstrapping and are not planning on raising finance at the moment
Bootstrapping essentially means that entrepreneurs look to start a business without resorting to external capital. Overheads are managed carefully and the fledgling operation is run on a shoestring until revenues materialise. This justification for not needing a business plan is, however, wedded to the archaic notion of 40-page, bound documents used solely to secure finance. Part of the confusion lies in the fact that the phrase ‘business plan’ is a homonym (i.e. has two separate meanings); a distinction first pointed out by business planning guru Tim Berry. The business plan can refer to the physical document but also the plan that needs to be implemented with goals, milestones and sales forecasting.
2. They don’t have the time
We are all increasingly pressed for time and during the start-up phase there is undoubtedly a lot to be done. Entrepreneurs using this excuse will argue that writing a business plan is time consuming and they have other more pressing tasks to accomplish, like designing their websites. Yet, when you ask them if they have any evidence of demand for their offering they will look at you blankly. Similarly, questions as to their ‘routes to market’ or to their predicted turnover for year one elicit the same blank responses.
The reality is that modern business plans can be very simple, yet are extremely beneficial in helping entrepreneurs to prioritise their work flows, to set the goals that need to be accomplished along the path to success, and to ensure they have a holistic view of the opportunity they are seeking to exploit.
3. They are not strong on the ‘business side’
Many entrepreneurs end up starting a business in an area where they have a particular skill. Others pursue a dream while many others start as solo entrepreneurs, having been made redundant from their roles. For these people, the notion of writing a business plan fills them with fear. Instead they stay busy getting set up and seeking customers without being able to demonstrate whether the opportunity they are looking to pursue is a commercially viable one.
I would posit that this cohort represents a strong proportion of those that do not survive the first year. Entrepreneurs need to have some commercial grounding and, if not, they need to hire someone who does. Business planning will help them identify areas they are weak in and will force them to confront the financials. Without knowledge of cash flow forecasts, pro forma profit and loss statements, balance sheets and the like, entrepreneurs run the risk of becoming insolvent before they even get going.
4. There is too much uncertainty for business planning
The argument entrepreneurs make when perpetuating this myth is that the world has become too uncertain to plan. My counter argument is that, precisely because of the increased uncertainty, we should be doing everything we can to consider likely scenarios and how they could affect the business.
Planning is not about being right; it is about considering a number of plausible future outcomes based on assumptions we make. By committing figures to these, we can be better prepared to manage. Once actual figures emerge, they can be plotted against the original plan to facilitate variance analysis, which exposes the gaps in the plan that need to be addressed as a matter of urgency. By broadening your horizons, you also reduce the risks of a ‘black swan event‘ occurring.
5. They are embracing the lean startup methodology
Lean startup is a movement based on the work of Eric Ries (supplemented by the likes of Steve Blank), which is gaining widespread appeal (particularly with tech entrepreneurs). It essentially advocates a set of start-up principles that are customer centric and focused on developing what is called a Minimum Viable Product, which is used to gain feedback about customer requirements and demand. While Ries may not explicitly talk about business plans, he is very focused on what he calls ‘innovation accounting’, which is essentially about measuring progress, setting milestones and prioritising work streams. Of course, these represent the very essence of business planning.
It is evident that many people remain wedded to the archaic notion of a business plan as a bound document consigned to a drawer upon completion. In reality, business planning is about setting SMART objectives, prioritising work streams, managing cash, and establishing goals and milestones against which performance can be tracked. As the old adage goes, ‘What gets measured gets managed,’ and in these tough economic times it holds as true as it ever did.
This article originally appeared on Smarta.