I attended an entrepreneurship development program about 7 years ago, where participants were required to come up with an idea, research the market, write a bankable business plan under the supervision of a business development specialist and defend your project before a panel at the end of the training. Majority of my classmates were employees and unemployed people. Only a few of us had actually started a business at the time of attending. But everyone in that room was interested in starting or growing a business. During classes, we were often told that the business plan is like your Business Bible; your most-priced business tool, guiding you through your business journey and decisions.
About a year after the program, I decided to reach out to my course-mates to find out how they were doing with their businesses. I was shocked to discover a common pattern; those of us who already had a business before attending the program were still in business but almost everyone who had no business before the program was yet to start one.
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It’s hard to reach a conclusion on this experience alone, but in this post, you will learn why you don’t need a formal business plan to start a business and what you need instead.
There is an unending debate about the importance of writing a formal business plan for start-ups or not. Some believe a business plan is a must to start a business. If you search for the keyword ‘Business Plan’ on Amazon book store you’ll get about 116,538 Results. There are many books on step-by-step guides and consultants in writing a business plan. Organizations and government agencies host business plan competitions for aspiring entrepreneurs every year. They all promote writing a formal business plan as the primary step to start a business.
As a result, aspiring entrepreneurs spend months to years perfecting a business plan that includes financial projections, market research, and how they intend to sell to 2% of a larger population and make a huge profit. However, the other group downplays its importance. Really…
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How important is a formal business plan to start a business?
Imagine playing a chess game with a planned out strategy. You have your SMART moves mapped out even before the game starts. You start with your plan at heart; probably the 8-move checkmate. You’ve got it all figured out…
Well, unless your opponent is an amateur, you are very likely to be disappointed as you get into the real game. Writing a traditional business plan before starting a business you have little to no experience in is like going to play a chess-pro when the only thing you know about chess is how the pieces move.
How successful businesses evolve
American Express started in 1850 as a regional freight express business (equivalent to the United Parcel Services –UPS). But the company accidentally shifted into a financial services company, to create “American Express Travellers Cheque”. This was not part of the plan at the inception of the company but in an attempt to exploit opportunities and solve an impending problem, the traveller’s cheque further evolved American Express towards financial and travel services.
Here is another example… What is the first thing that comes to mind at the mention of the name HP? Computers, right? Was that part of the strategic business plan? In 1965, Hewlett Packard – HP designed its first small computer to add power to its instrument products. This was how the former Chief executive, John Young explained it:
It was basically an under the bench thing. We didn’t even call it a computer. We called it an ‘instrument controller’. Although we knew computers would be important in the future, we wanted to maintain our reputation as an instrument company and did not want to be known as a computer company.
HP didn’t start as a computer company but they evolved into one.
This does not suggest that successful businesses do not make strategic business plans. Rather they allow themselves to be flexible, adapt and evolve their business according to opportunities and market need, and not based on a rigid business plan. This is a concept Jim Collins called the ‘evolutionary progress’, based on the evolutionary theory of survival of the fittest; try a lot of stuff, keep what works, discard those that don’t work. In his book, Built to Last, he wrote:
Visionary companies make some of their best moves by experimentation, trial and error, opportunism and by accident. What looks like a brilliant foresight and preplanning was often the result of “Let’s just try a lot of stuff and keep what works.”
They usually begin with small incremental steps, often in the form of quickly seizing unexpected opportunities – rather than spending time on formal business plan.
For instance, had American Express not evolved into Financial and travel services, it would have disappeared with most freight companies after the US government nationalized all freight express businesses in 1918, creating a catastrophic industrial disruption.
This proves that the formal business plan does not fit the title of the ‘business bible’ for entrepreneurs. Rather the entrepreneur is often guided by his intuition and drive for progress, than a formal document.
When you need a business plan
A study released by Babson College analyzed 116 businesses started by alumni who graduated between 1985 and 2003. Comparing success measures such as annual revenue, employee numbers and net income, the study found no statistical difference in success between those businesses started with formal written plans and those without them. The study concludes that “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.”
Focus on Knowing your customer
Benson Honig, a professor at Wilfrid Laurier University in Ontario, Canada, says his research of 396 nascent entrepreneurs in Sweden from the late 1990s also found no correlation between business planning and profitability. Instead, his study found the biggest predictor of success to be knowing customers in advance. Mr. Honig says he teaches “contingency planning” to his students — or thinking about business as constantly progressing, changing and making decisions based on the market climate — instead of traditional business planning.
You need clarity of purpose
While writing their book – Heart, Smarts, Guts and Luck, Anthony Tjan and his colleagues interviewed and surveyed hundreds of successful entrepreneurs around the globe to better understand what it takes to be an entrepreneur and build a great business. One of their most striking findings was that, of the entrepreneurs surveyed, about 70% did not start with a business plan. Instead, their business journey originated from their heart. Clarity of purpose and passion ruled the day with less time spent writing about an idea and more time spent just doing it.
He said, “It’s not that all planning is bad. It’s that efforts to write the ‘perfect’ business plan usually lead to being precisely incorrect rather than approximately correct. One problem is that the content that most people focus on in business plans has little to do with the reality that will actually emerge. Many start-up plans emphasize some gigantic potential market and how getting just the smallest sliver of it will make them and investors rich“.
The plan is useless; it’s the planning that’s important
These were the words of Dwight D Eisenhower, “the plan is useless; it’s the planning that’s important”
Most business plans are the works of people predicting the future, documenting uncertainties and making assumptions. Who would think spending a year creating a business plan is a good exercise? Or that a document is more important than people? Or that formal business plan signifies success? The best content for your business plan is real-world data based on testing and experimenting ideas.
The business planning process is what steering is to driving; it takes constant adjustment and adaptation to stay on course. A more practical approach for entrepreneurs who aren’t seeking external start-up financing from venture capitalists or angel investors is to write a “back-of-the-envelope” plan with basic financial projections, such as cash flow, and fine-tune the business model after launching the business… ‘Just do it’. This is the concept of Ready; Fire; Aim. Not Ready; Aim; Fire. You Plan as you go.
Did you start your business with a formal business plan? Please share your experience in the comment section below.
