Are business plans a waste of time?

I recently attended a national entrepreneurship conference along with other well-known university professors and entrepreneurs. I found it interesting that two concurrent sessions offered conflicting views on business plans. One session featured a panel of successful entrepreneurs who questioned the relevance of business plans in the real world. The other session focused on teaching students to quickly and correctly develop business plans.

I was intrigued by the panel discussion, so that was the session I attended. None of the entrepreneurs on the panel had ever written a business plan, at least for starting a business, but they were all extremely successful. The revelation that they didn’t use written plans isn’t surprising, most entrepreneurs don’t. One of the reasons given by the panel for forgoing a formal business plan is the natural tendency of entrepreneurs to stick with a business plan they wrote due to the investment of time and effort. The reality, they said, is that things change so much in the real world of business that the assumptions behind a business plan often have to be changed or even abandoned to allow the business the flexibility it needs to survive. Furthermore, the entrepreneurs insisted that a good plan will not make a bad idea work, and that a great idea is unlikely to be hampered by a poorly written plan, or no plan at all. Another concept discussed in the session was that what the entrepreneur is really selling to the venture capitalist or angel investor is the entrepreneur. One of the panelists commented that “if investors believe in you, they will invest in your business.” The consensus of the panelists was that investors look for passion and vision in addition to the idea. They must be convinced that the entrepreneur is capable of persevering and making good decisions and adjustments to keep the business going. Given that college instructors attended and that most entrepreneurship programs require written plans, all of the entrepreneurs on the panel diplomatically agreed that requiring a business plan as part of a course or program of study was not a waste of time. They competed that the process itself could offer valuable information.

As a university entrepreneurship instructor, I try to convey as realistically as possible the realities that entrepreneurs face. After attending this conference I realized that students can have a hard time reconciling the two seemingly contradictory points of view presented in the workshops. Certainly my students are aware of the statistics that suggest that most entrepreneurs enter a business without a written plan. Trying to convince them otherwise would be disingenuous. If the panel was right, why bother with a business plan? I think the answer lies in the last nugget that the entrepreneur panel offers; it is the process that is most beneficial.

The planning process does not start with the business plan. In fact, it is a mistake to write a plan too soon. A feasibility analysis should be carried out before the plan is written so that the key assumptions underlying the plan are properly examined. Research conducted as part of a feasibility analysis can also lead the entrepreneur to better understand their business. For example, if a focus group is used to better understand the target market, new insights can be gained that can lead to the development of a more competitive business model. The results of the feasibility study and the articulation of a compelling and competitive business model are the most critical components of a business plan. Coupled with a cash flow analysis, these facts can be critical when acquiring the resources needed to launch a new business.

Another point that I like to discuss with my students is that the importance of a business plan depends on the type of business. A retail store with a large capital requirement, inventory, payroll, etc. it’s completely different than a startup in a rapidly changing and evolving technology-driven industry. A business similar to Facebook, for example, has much less need for a formal business plan than the owner of a new sporting goods store.

Also, the amount of borrowed capital required to launch a business will affect the need for a formal plan. The venture capitalist will generally want to review at least certain sections of a formal plan as part of their due diligence.

I think the entrepreneurs had a valid point regarding the tendency of business owners to get too attached to a formal plan. A critical moment occurs when the business is launched and the entrepreneur begins to receive real feedback from customers. The decisions made at this time can make the difference between the success and failure of the company. Should the employer stick to the assumptions of the plan or should he make minor or major adjustments? The entrepreneur must remember that the business is not on autopilot just because it has a polished business plan. Adjustments should be made as warranted.

The panel was not wrong to question the need for a formal business plan, but the planning process is different from the plan. A business plan, whether required or not, will allow the entrepreneur to better articulate his vision, which can make writing a plan worthwhile.

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