Business Plan – Is it necessary?
You are bit by the entrepreneurial bug and consumed by the euphoria of a novel idea on how to transform today’s capital (owned, borrowed or…) into tomorrow’s wealth. You have done your due diligence and the verdict is in; it’s a great business idea with a high probability of success.
So what is the next step?
The classical approach focuses on the development and documenting of a detailed business plan that outlines the entrepreneurial vision while serving as a compass in the capital-to-wealth transformation process. Whereas this sounds all scholarly and “right”, the question as to whether or not it is necessary still begs to be answered. The plethora of publications, both for and against, that has been written on this subject clearly indicate the absence of a definitive yes or no answer to the question.
None of the information presented here is new but a mere rehashing of the results of studies and research previously carried out by scholars and practitioners. My weighting in on the subject is occasioned by the many “should I, or shouldn’t I?” questions that I receive from both current and aspiring entrepreneurs as well as a desire to indicate the side of the debate with which I am aligned.
A study conducted by Babson College analyzed 116 business start-ups. Comparing success measures such as annual revenue and net income, the study found no statistical difference in success between those businesses started with formal written plans and those without.
Whereas everything is right with creating a business plan, there is absolutely nothing wrong in not having one. A great plan will not make a lousy idea successful, and a lousy plan will not necessarily stop a great idea from coming into its own. One should however be careful not to draw the wrong conclusion as analysis and strategic planning are essential to business success.
A business plan is a tool – one of many that may be employed to increase the probability of business success. It however does not have a life of its own and is certainly not an end in itself.
My position therefore mirrors the conclusion of the Babson study and also the sentiments expressed in Guy Kawasaki’s article. He states:
“Unless you need to raise external startup capital from institutional sources or business angels, you do not need to write a formal business plan. Instead, do some basic financial planning (which must include projections of sales revenue, operating costs, and purchases of assets) and launch your business. Later on, if your business grows and needs an infusion of substantial external capital, that will be the time to write a formal business plan. What’s more, your story will then be much more persuasive because you will have products and customers, you will have proven your entrepreneurial mettle, and your business will have a higher valuation.”