Business Plans: What are they good for?

Encyclopedia

Business plans are considered standard fare for the budding entrepreneur. Business mentors and guides will tell you that you must have a business plan in order to succeed. Even if you aren’t looking for funding or loans, and even if your business already exists, they will tell you that you must put together a business plan in order to create structure and discipline for your business.

But do you really need a business plan?

An excellent article on Wall Street Journal’s “Startup Journal” looks at some recent studies on the effectiveness of business plans. According to a study recently released by Babson College, businesses that began with a formal business plan were not more successful than those without. Another study conducted by Amar Bhidé, a Columbia University entrepreneurship professor, found that 41% of Inc. magazine’s 1989 list of the 500 fastest-growing private firms didn’t have business plans and 26% had only rudimentary plans.

The Problems with Business Plans

I never wrote a formal business plan because I felt uncomfortable with the idea. Business plans try to pin the business owner down to a specific idea and goal. That is not necessarily a bad thing, since focus is good. But very often businesses start out with one product or service in mind, and shortly discover that something else will be more profitable. This means that their precious business plan that took so much time and even money to put together is now outdated.

Another problem with business plans is that many entrepreneurs are under the impression that they can’t or shouldn’t start their business until their business plan is completed and is a work of art. Since the conventional business plan format is often encyclopedically long and heavy, its composition can significantly delay the opening of a new business. Also, this type of approach to action where everything needs to be thought out and analyzed to death before implementation is not necessarily beneficial to a young business in general. There are many situations where the modus operandi should be act now, think later, or else many opportunities may be missed.

So who does need a business plan?

The Babson College study concludes that the only ones who need a business plan are those who want to raise external start-up capital. But if you are a bootstrapper, and you are building a low-cost, lean business with no outside financing, you don’t necessarily need the usual 30 page document.

My opinion is that every business should have some type of business plan since it helps their owner focus their goals and learn more about their industry. My favorite business plan format is the one page business plan!

One page business plan

This template focuses on the core issues an entrepreneur needs to answer about their business, and encourages brief, succinct answers. You can complete this plan in a morning, and launch your new venture by lunch.

Here are some links to other articles related to business plans that you might find interesting:

  • Lesson Learned: Don’t write a business plan, esyLife. Theo Tonca describes how he spent a month writing a business plan for his new startup, and now it sits gathering dust in his desk. He says if you want to raise money, investors care more about a proven business model and profits than they do about a business plan.
  • Business plans should be simple, passionate, USA Today. A long business plan will not save an unprepared business. “The real key to being an entrepreneur who has a chance to succeed is knowing precisely what business you’re in. If you don’t, you die.”
  • Why you don’t need a business plan, Heart of Business. “For a truly micro-business, or being self-employed, a business plan is a recipe for disaster.” The author of this article says that a new business only needs to know three things: the target market, products and services, and if it has sufficient nourishment, i.e. capital.
  • 8 Outdated Notions of Entrepreneurship, Brazen Careerist. Penelope Trunk compares the “old” notion of entrepreneurship to the “new.” In the “old” model, entrepreneurs raised lots of money and spent it on advertising, while the “new” do not raise any money, and spend none on ads. “Old” style entrepreneurs planned a lot to make sure their new idea would work, while “new” owners “Forget the big plan.” They just go for it, and if it doesn’t work, they try again. See Penelope’s other excellent articles about entrepreneurship: 9 new ideas that may sway on-the-fence entrepreneurs, and Finding courage to steer your career.
  • Getting Real, 37signals. 37signals is a privately held developer of web-based software that is used by over 1 million people and businesses in 70 countries. What makes them remarkable is that they “launch[ed] five successful web-based applications (Basecamp, Campfire…), and Ruby on Rails…in just two years with no funding, no debt, and only 7 people. [my bold]” Getting Real is a book that describes the “unconventional” process used by 37signals to achieve their success, which includes avoiding long, heavy planning strategies and simply taking action. Highly recommended.

Responses (2)

Penelope Trunk

January 26, 2007 12:48 am

What a great post. Thank you for linking to Brazen Careerist, but an even bigger thank you for putting together one of the most useful resources I’ve seen for writing a business plan — way more realistic and grounded that the usual stuff.

David Gadish, Ph.D.

February 26, 2007 7:48 am

To find out more about business plans, please visit http://www.Gadish.com

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