Do Business Plans Really Matter?

Ed the Roofer

I read an interesting article from the Wall Street Journal today, which minimized the effectiveness of going through the tedious process of creating a master business plan.It makes the assumption that, you learn about your business by doing so, but the effect it has on your business is of little consequence.Happy Reading,P.S. Sorry about the formatting. I tried to edit it for no run on sentences, but it did not work for some reason.Ed

SMALL TALK By KELLY SPORS The 100-Page Start-Up Plan -- Don't Bother.If you've considered starting a business, or actually have done it, you've probably been instructed to write a business plan. Perhaps you even bought a business-planning guide walking you through elaborate details of market analysis, sales projections and operational plans.But while there's a lucrative industry of software, how-to books and business coaches preaching the merits of lengthy planning -- and selling their business-planning expertise -- a growing body of research suggests that some entrepreneurs spend way too long polishing 50- or 100-page business plans when they should be out in the marketplace selling their product or service.

It doesn't take a year of planning to figure out whether someone is going to buy your product," says William Bygrave, a Babson College entrepreneurship professor. All you have to do is start selling it.

Important Questions
Some entrepreneurs get so caught up in polishing their written plan, they lose sight of make-or-break issues, such as whether they have actual people clamoring to buy their product and who will sell it. Sometimes, the product can't be manufactured and sold at a price that will make a profit.But it shouldn't take a year of long-winded planning to figure that out.Mr. Bygrave and a few of his colleagues were so curious about the value of written business plans that they analyzed 116 businesses started by Babson alumni who graduated between 1985 and 2003.Comparing measures such as annual revenue, employee numbers and net income, they found no statistical difference in success between those businesses started with formal written plans and those without.

The study concludes: "Unless you need to raise external start-up capital from institutional sources or business angels, you do not need to write a formal business plan.Other research has come to similar conclusions. Columbia University professor Amar Bhide analyzed Inc. magazine's 1989 list of the 500 fastest-growing private businesses and found that 41% of them didn't have any business plan, and 26% had rudimentary plans.He found that many opportunities need to be pursued quickly -- and to take advantage of them you can't wait for the planning process to be completed.

Dumping the Plan
Many business plans get tossed out the window the day after launch, because the plan wasn't grounded in reality.Traditionally, when a business plan has been essential is when a start-up is pitched to potential investors. But even that's changing. Many venture capitalists and angel investors now say an effective 10-minute slide presentation or executive summary can be more effective than a full-blown written plan.Investors often base their decision to invest on their trust in the people running the business as much as the idea itself.Most venture capitalists base the decision on a five-minute conversation or 10 PowerPoint slides," says Guy Kawasaki, a Silicon Valley venture capitalist and creator of AllTop.com.Too often, he says, entrepreneurs try to pitch venture capitalists with projected sales forecasts that show a large upward trajectory, when "we know it has no relation to the truth.

Forget About Planning?
So ditch the planning altogether? Not so fast. While the formal written plan itself may not be worth much, the planning process can be very helpful in honing strategy and dodging potential calamities. Just don't spend too long on it.Mr. Kawasaki says entrepreneurs should spend no more than a few months planning and writing a plan of less than 20 pages. He recommends addressing three key questions: Who's going to make it? How are we going to sell it? How are we going to service it?The most important thing they should do is create a prototype" of their product, Mr. Kawasaki says. Spend your time creating prototypes, not plans.The value of the planning is it forces you to go through the various scenarios and troubleshoot hypothetical problems or roadblocks. You can address, for instance, what sales channel will be most lucrative and the most opportune sales price -- decisions that have to be made before you hit the market.

Flexibility Is Crucial
But for certain, much of the real planning happens once you start selling and hit realities you may not have anticipated.And it's important to recognize when there's a flaw in the plan and be willing to change directions or ditch plans altogether when they're clearly not working, says Tom Kinnear, executive director of the entrepreneurial studies institute at the University of Michigan.A business plan should just be a compass, he says, pointing entrepreneurs in the right direction before starting their business. Too many entrepreneurs get wrapped up in perfecting their written plans, which he says shouldn't take more than a few weeks to write. No business plan has ever survived contact with the marketplace, he adds.Write to Kelly K. Spors at @ kelly.spors@wsj.com

threaderman

My business plan is 10-15 pages,and as should be,it is never stagnant, and always evolving.A bus. plan is always being tweaked and improved on,IMHO.

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Mike Finley

I think the title to the article shouldn't be do business plans matter, but rather don't spend a year on a business plan.

I would also say that comparing businesses success rates who used a business plan and those that didn't and finding little difference should be taken with a grain of salt when the businesses were started with people with MBA's, grads from Harvard, involved venture capital... etc..

... and giving any validity to that when you are talking about contractors!

I think most would find that contractors and MBAs probably have different advantages in regard to starting businesses.

ultimatetouch

Last year was the first year I had any kind of plan. It gave me an idea of what I should be selling a month and what I was trying to gross per year. I thought I was shooting for 25% profit margins and it turned out I was making 40% profit margins. Mostly because I get proper bids and am always shaving costs some how.
The bottom line is we were shooting for 750,000 in gross sales and we we sold between 900,000 and 1,000,000.

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Ed the Roofer

I really want to apologize for the formatting of the initial post.

I edited it to get rid of all of the run on sentences and paragraphs which I copy/pasted directly from the Wall Street Journal article, but when I submitted it 3 seperate times, it still bunched all of the information and sentences together.

Whoops. It won't let me straighten it out.

Ed

Double-A

I rastled it to the ground and done made it say, "uncle".

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Grumpy

I think business plans matter for a couple reasons. A) they make you think, B) if you need capital you may need a plan.

However I do not think business plans, in the traditional sense, matter much. They are too bulky and cumbersome for the small business. I think a handbook in conjunction with budgets and non-traditional marketing and strategy plans are more important. What's a non traditional marketing plan? Basically a month by month summary of what youa re going to do that month, what it's going to cost you and how many leads you are going to yield. What's a strategy plan? Think of it as a business plan that actually makes sense.

ultimatetouch

Thats what I was thinking about doing this year. Have a schedule for advertising release. Then know how much its going to cost per month and for what. Hopefully my new book keeper will print the reports I need to see how I am doing throughout the process.

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Marcus W

I FEEL A BUS PLAN IS A MUST.NOT THE 20 PAGER THOUGH JUST NEED A COUPLE OF PAGES FOCUSING ON HOW YOU WANT TO OPERATE YOUR BUSINESS, MARKETING , TARGET AREAS ,SIZE OF JOBS YOU WILL TAKE ON, TYPE OF WORK ETC.ALLOT OF PEOPLE DON'T REALIZE IT BUT ALLOT GOES INTO A SUCCESSFUL BUSINESS.MOST OF IT REALLY HAS TO DO WITH THE GROWTH OF YOUR COMPANY. IF YOU WANT TO GROW EVERY YEAR AS FAR AS SALES ITS A MUST. FOR EXAMPLE THE BUSINESS PLAN WILL FORCE YOU TO DEAL WITH SOME TOUGH QUESTIONS AND SOME QUESTIONS YOU NEVER EVEN THOUGHT OF. BUS PLANS CAN BE HUGE THIS IS JUST A DROP IN THE BUCKET. HOPE IT HELPS THE REST OF THE GUYS SHOULD BE ABLE TO IMPROVE ON IT.COUPLE GENERAL QUESTIONS YOU CAN ASK YOURSELF
#1 HOW MUCH DO I WANT TO A EARN A YEAR?
#2 MARKETING ASKS THE QUESTION OF WHO KNOWS ME AND WHAT I DO
#3 WHERE DO YOU SEE YOUR BUSINESS IN 3YRS ETC.


"BID WHAT YOUR WORTH ,HOPE YOU HAVE A HIGH OPINION OF YOURSELF" ANONYMOUS

porkchop

I agree with many of the comments being made. The plan should be used to explore your idea, find out about the market, competitors, techniques etc. It can be used for goals in income, growth and much more. You need to create atleast a mini-business plan to have direction and purpose.

My first company I opened w/o one and lets just say it didnt turn out very well. My most recent ventures have business plans that are about 15-20 pages. It forces me to think the whole process through of how it all works. Then improve and create processes so that the business runs more efficiently and i make more money!

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ChrWright

I think the exercise of building a business plan is incredibly important for a contractor.

Many come to owning their own business without the experience or education to run one effectively. Writing a business plan can be the crash course you need to learning how to run your business profitably, and all the things you must plan for and manage.

From financials, to marketing, to positioning and everthing in between--it will intruduce you to some very important concepts and stimulate your thinking.

I agree you shouldn't spend months and months on it--it's too easy to end up in "analysis paralysis." But even a little bit of forward thinking can go a long way towards keeping you in the black.

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orson

[quote=Mike Finley;380747]I think the title to the article shouldn't be do business plans matter, but rather don't spend a year on a business plan.
[quote]

I think Mike is right on here. A business plan is absolutely worth suffering through, and as with most things the more suffering the greater the lessons learned. Having said that, the suffereing can certainly be a month or two rather than much longer.

Another important consideration....

I went into my bank to schedule an appointment for a line of credit w/o my business plan in hand. The banker insisted on having an impromptu meeting and basicaly said the best they could do was a 30k line.

I went into another bank with a well constructed business plan(3 month project on my part) in hand. The plan included solid market research supported by demographic data, market studies from a few universities, a very involved and thorough financial model (Excel spreadsheet setup supplied by my SCORE advisor) and well written although concise narrative(total narrative about 34 pages), a proffessionaly designed logo, 1/6 page advertisement and the magazine it would be running in, door hangers, a signed contract for 2 bathroom remodels. Bank gave me 60k LOC(which is what I was asking for) w/o even blinking. I think I could have gotten 100k if I had asked for it, mostly because of the well written business plan, and more importantly, the detailed financial model.

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Vinny

I think Orson's blog from ruby construction is exactly what the article is about.

If you are in need of capital, a mega plan may be needed. But if its planning you want to do for the sake of planning, you probably dont need "war and peace" as a prototype.

I've done both types. The large form and the short form and both are helpful.

I wouls suggest and recommend though to at least do one or the other. Its eye opening and rewarding. And who knows, you may even achieve some of the goals you set if you follow it

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