Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan. Such a plan must include your goals for the enterprise, both short and long term; a description of the products or services you will offer and the market opportunities you have anticipated for them; and finally, an explanation of the resources and means you will employ to achieve your goals in the face of likely competition. Time after time, research studies reveal that the absence of a written business plan leads to a higher incidence of failure for new and small businesses, as well as inhibiting growth and development.
Preparing a comprehensive business plan along these lines takes time and effort. In our experience at Cranfield on our programmes, anything between 200 and 400 hours is needed, depending on the nature of your business and what data you have already gathered. Nevertheless, such an effort is essential if you are to crystallize and to focus your ideas, and test your resolve about entering or expanding your business or pursuing a particular course of action. Once completed, your business plan will serve as a blueprint to follow which, like any map, improves the user’s chances of reaching his or her destination.
There are a number of other important benefits you can anticipate arising from preparing a business plan:
Another entrepreneur found out that, at the price he proposed charging, he would never recover his overheads or break even. Indeed, ‘overheads’ and ‘break even’ were themselves alien terms before he embarked on preparing a business plan. This naive perspective on costs is by no means unusual.
As under-capitalization and early cash-flow problems are two important reasons why new business activities fail, it follows that those with a soundly prepared business plan can reduce these risks of failure. They can also experiment with a range of alternative viable strategies and so concentrate on options that make the most economic use of scarce financial resources.
It would be an exaggeration to say that your business plan is the passport to sources of finance. It will, however, help you to display your entrepreneurial flair and managerial talent to the full and to communicate your ideas to others in a way that will be easier for them to understand – and to appreciate the reasoning behind your ideas. These outside parties could be bankers, potential investors, partners or advisory agencies. Once they know what you are trying to do, they will be better able to help you.
The empirical data also strongly supports the value of business planning. Studies consistently show that organizations with a strong planning ethos constantly outperform those who neglect this discipline.
A review of research articles on this subject has been written by Noah Parsons, Business Planning Makes You More Successful, and We’ve Got the Science to Prove It (2017).
The research concludes that people who prepare a business plan are twice as likely to actual start their business and, once started, grow 30 per cent faster. In addition they are much less likely to fail.
Despite these many valuable benefits, thousands of would-be entrepre-neurs still attempt to start without a business plan. The most common among these are businesses that appear to need little or no capital at the outset, or whose founders have funds of their own; in both cases it is believed unnecessary to expose the project to harsh financial appraisal.
The former hypothesis is usually based on the easily exploded myth that customers will all pay cash on the nail and suppliers will wait for months to be paid. In the meantime, the proprietor has the use of these funds to finance the business. Such model customers and suppliers are thinner on the ground than optimistic entrepreneurs think. In any event, two important market rules still apply: either the product or service on offer fails to sell like hot cakes and mountains of unpaid stocks build up, all of which eventually have to be financed; or it does sell like hot cakes and more financially robust entrepreneurs are attracted into the market. Without the staying power that adequate financing provides, these new competitors will rapidly kill off the fledgling business.
Those would-be entrepreneurs with funds of their own, or, worse still, borrowed from ‘innocent’ friends and relatives, tend to think that the time spent in preparing a business plan could be more usefully (and enjoyably) spent looking for premises, buying a new car or designing a website. In short, anything that inhibits them from immediate action is viewed as time-wasting.
As most people’s perception of their business venture is flawed in some important respect, it follows that jumping in at the deep end is risky – and unnecessarily so. Flaws can often be discovered cheaply and in advance when preparing a business plan; they are always discovered in the marketplace, invariably at a much higher and often fatal cost.
There was a myth at the start of the internet boom that the pace of devel-opment in the sector was too fast for business planning. The first generation of dot.com businesses and their backers seemed happy to pump money into what they called a ‘business’ or ‘revenue’ model. These ‘models’ were simply brief statements of intent supported by little more than wishful thinking. A few months into the new millennium, a sense of realism came to the internet sector. In any business sector only ventures with well-prepared business plans have any chance of getting off the ground or being supported in later-stage financing rounds.