There is a debate whether writing a formal business plan helps start ups succeed or not. For every study the proves business plans work, there is different study that proves the opposite. However, a well written business plan can be a useful tool to every business - when actively used, updated and referred to.
One of the most comprehensive studies performed by the University of Michigan's Panel Study of Entrepreneurial Dynamics II team (Copyright: 2016 Strategic Management Society) looked at 1,088 US based entrepreneurs over a period of 6 years (2005-2011) and this study confirmed that it pays off to plan.
Entrepreneurs who create plans are 16% more likely to reach positive cash flow than their otherwise identical non-planning entrepreneurs. The study also focused on why entrepreneurs chose to write a business plan. The findings are two fold:
1. Entrepreneurs seeking external financing are 19% more likely to write business plans.
2. High growth oriented start ups are 7% more likely to write a business plan.
Harvard Business School professor William A. Sahlman identifies five key aspects in a solid business plan:
Identify people starting the business, top management, suppliers, lawyers, accountants and key stakeholders. Focus on their skills, experience, capacity and strengths. At the end of the day, it's the right people and network you create around your business that makes your business thrive and succeed.
2. Business Profile
Discuss what product or service your business is selling, the price, who the target customer groups are and why, your competition. Don't shy away from being truthful about your strengths, weaknesses, as well as what opportunities and threats your business faces.
Your business is not a stand alone unit. Highlight the environmental and political context your business operates in, what regulations it must adhere to and how it will succeed under the current macroeconomic conditions.
4. Risks and Rewards
The fourth aspect of a successful business plan is a "what if" section that will show your team and your potential investors that you had thought of a variety of scenarios and have planned for these, should they occur. Running your business through a stress test scenarios and answering how your business will prevail in a variety of conditions. Answer questions such as: what if the owner choses to retire, what if interest rates increase, what if our main supplier goes bankrupt, etc...
5. Business Model
The goal of every business is profitability. And profitability rarely happens accidentally. You must show how and when your business will turn profit and how your investors will eventually get their return when and once the business succeeds.
An entrepreneur must look at a business plan as a vision, direction and a formal blueprint of her or his organization, not a "thing I have to do".
Instead of writing a business plan and shoving it into the bottom drawer of your desk, or hidden folder in your old laptop, an actively managed business plan is a successful tool that keeps your organization on a clear, focused path to success.
My advice to clients is to have a strong vision for their business, including a solid business plan, strategy map and an action board. If people and organizations can describe the strategy, goals and actions, they will be more likely to reach them.
Yours in business,
Lenka Bolton, CPA, CMA