Business plan production seems to always create more questions than one could possibly answer. The first of those questions should involve the very decision to create one. Rosalind Resnick weighs in on the issue, and as much as I’d like to say I disagree with her findings, I do not. I feel it far more important to get in the market and let your potential customers inform as to what you should be doing next, as opposed to a pile of often stale research and excel spreadsheets. You show growth and revenue, you will get funded. Really, it is that simple.
Over the last few years, I’ve heard business plans described as irrelevant, obsolete and a conspiracy by consultants and business schools to take advantage of inexperienced entrepreneurs with more dollars than sense.
After all, who needs to write a 50-page term paper or build a complex financial model in Excel when a start-up like Twitter can launch a web site, command a billion-dollar valuation from top venture capitalists and figure out how it’s going to make money after it gets funded? In fact, a 2007 survey conducted by Babson College of 116 businesses launched by its alumni between 1985 and 2003 found no statistical difference between the success achieved by those businesses that started with a formal business plan and those that forged ahead without one. The only companies that really need a business plan, Babson’s researchers concluded, are businesses seeking to “raise external start-up capital from institutional sources or business angels.”
As an entrepreneur myself and now a consultant to start-ups and early-stage companies, I can’t deny that the critics of business planning have a point. If you’re starting a home-based service business that requires no employees, no overhead, no inventory and minimal capital outlay, then you probably don’t need to waste your time or money on a formal business plan. (NetCreations, the Internet start-up that I launched as a home-based web design firm in 1995 with a partner, didn’t have a business plan until we decided to take the company public four years later.) But if you’re starting a retail store, restaurant, fashion label, real estate venture or e-commerce business that requires people and capital to help you build it, then I’d say you do need a business plan – even if the only investors you ever pitch are Mom and Dad.
Here are five common misconceptions that entrepreneurs have about business plans and the planning process:
1.Business plans aren’t necessary unless you’re planning to raise capital from banks or VCs.
Even if you never take a dime of “other people’s money,” you need to make sure that you don’t throw your own hard-earned savings down the drain. A good business plan can help you figure out how much capital you need to launch your business and how much revenue, profit and cash flow your business is likely to generate in the future.
2.Investors don’t take business plans very seriously. They know that the numbers are garbage.
While a PayPal co-founder or former Google executive may be able to raise money with a couple of scribbles on a napkin, a newbie entrepreneur needs to convince potential investors that his or her company is going to beat out the competition and deliver above-market returns. If you don’t have a track record, you’ll need to tell your story in language that investors can understand – the language of money.
3.Nobody reads business plans any more. All you need is a deck of PowerPoint slides.
While nobody wants to slog through a 50-page business plan just to find out the deal isn’t for them, an investor who’s serious about putting money in your company will want to see that you’ve done your homework. This means researching the market, the competition, the manufacturing costs and the potential distribution channels and coming up with a viable strategy that can take your company to profitability within the first few years of operation. Slick slide decks with little behind them rarely get funded.
4.Nobody has a crystal ball that can predict your business’s future. You’re better off figuring things out as you go.
While that strategy may have paid off for Twitter and a handful of other Internet-based businesses, that’s generally not the case for restaurants, retail stores, fashion labels and other companies that operate in the real world of payroll, inventory and equipment. Start-up entrepreneurs who fail to raise enough working capital to carry them to profitability may see their businesses go under just as their sales begin to take off.
5.Business plans aren’t necessary for a company that’s already up and running. They’re a distraction from running your business.
It’s unfortunately true that most small-business owners are too busy putting out daily fires to plan for the future. But business owners who fail to plan often hit a roadblock when their business outgrows the founder’s own resources and requires additional capital and staffing to take it to the next level. The best time to plan is when your company has money in its bank account, not when its resources are strained and you’re strapped for cash.
Now I’m not suggesting that, just because your company needs a business plan, you necessarily need to hire a high-priced MBA or consultant to write it. What I am advising is that you take the time to map out your strategy in words and numbers so that you can figure out for yourself where you want your business to go and how you’re going to get there. You’ll be glad you did.
Source: WSJ
