It is common to hear about business plans when we speak of businesses in the early stages. However, creating a great business plan can be time-consuming and difficult, which is why many entrepreneurs steer clear of these plans. What if this was an error?
Although the majority of people are familiar with the “soft” arguments for and against the need to write a business plan, in this article, the Toptal Finance Expert adopts a method based on data when discussing the issue. In this article, he reveals ample evidence to back the idea that creating an effective business plan is a good use of time spent.
Individuals Who Write Business Plans Are 2.5x More Likely to Become Entrepreneurs
A lot of people have business plans throughout their careers, but most of the time, the ideas do not get a chance to be realized or get lost in their daily responsibilities. Incredibly, research supports the idea that people who create business plans are much more likely to establish their businesses. The data taken from the study of Panal Entrepreneurial Dynamics in actuality indicates there was evidence that those who wrote business plans were 2.5x as likely to be in business. It was a study that polled more than 800 individuals throughout the United States who were in the process of launching companies and came to the conclusion that “writing a plan greatly increased the chances that a person would actually go into business.”
The cause of this phenomenon isn’t easy to determine. There are a variety of possible explanations for this relationship between the writing of business plans and actually launching businesses. However, William Gartner, Clemson University Entrepreneurship Professor and the author of the Panel Study, believes that “‘research suggests the importance of a business plan. It’s about taking the walk. Business plan writers are also more involved. Doing more, for example, conducting research on markets and creating projections, improves the likelihood that the entrepreneur will stick to their plan.”
Studies show businesses’ plans are primarily concerned with walking your walk. Business plan writers additionally do more. In addition, doing more tasks like researching the market and making projections increases the likelihood that entrepreneurs will stick to their plans.
William Bygrave, a professor retired from Babson College, came to the identical conclusion despite previously proving “that entrepreneurs who began with formal plans had no greater success than those who started without them.” Bygrave is able to admit it is true that “40% of Babson students who have taken the college’s business plan writing course go on to start businesses after graduation, twice the rate of those who didn’t study plan writing.”
Business Planning Improves Corporate Executive Satisfaction
Another key way business plans can be of tangible benefit is to align every employee in an organization to the strategy and vision for the future. This, in turn, carries crucial implications for the satisfaction of executives. A study conducted by McKinsey & Company, which surveyed over 800 corporate executives across different industries, supports this conclusion. The study found that McKinsey discovered that “formal planning processes for strategic development have a significant role to play in improving the overall satisfaction of the development of strategies. This can be seen in the comments of majority of managers who said that the formal process played an important role in the development of strategies and were happy with the strategy of their company, in contrast to just 21 percent who believed that the process didn’t play a major role. If we look at it another way five percent of respondents whose firms had no formal planning process were unhappy with their process for the creation of strategies, as opposed to just 20% of the respondents at companies that have a formal plan.”
But of course, not every planning is created equal. The mere act of planning isn’t going to produce the desired effect. According to McKinsey themselves stated in their research, “Just 45 percent of respondents were happy with the process of strategic planning. Additionally only 23% said that the most important strategic decisions were taken within the confines of the process. Based on these findings managers may be enticed to abandon the entire planning process.” Therefore, business owners and entrepreneurs should spend the time and energy needed to develop an effective and well-written business plan. In the next article, I will outline a few aspects of a well-written program.
Business Plans and Their Financial Models Are Valuable to Angels and Venture Capitalists
A lot of entrepreneurs will need to raise capital from outside investors to expand and grow their businesses. From my experience, it is a key tool in maximizing the chance of obtaining funds from outside investors. A well-written business plan not only aids investors in understanding your business and the goals you have set but also demonstrates that you’ve taken time to be attentive and thoughtful about the challenges your company will have to face, along with the more specific questions regarding the financials and fundamentals that your model of business.
Nathan Beckford, CFA, is the director of FounderSuite, the fund platform used by startups at Y Combinator, TechStars, 500s, and many more to raise more than $750 million. Nathan illustrates the above point nicely in an email he wrote to me recently: “Prior to starting Foundersuite.com, I ran a startup consulting business called VentureArchetypes.com. In the early years, the main focus of our task was to produce beautiful, bold, and sassy business plans for startups to show to investors. By the middle of 2000, the business plans began to fall out of fashion due to the “Lean Startup approach gained traction. Instead of writing a plan, we witnessed an explosion in demand for more detailed financial models. In the end, I believe it is beneficial to take time to think and be strategic prior to the launch of a startup. Do you need to put it as a 40-page document? No. However, if it’s the format that works best for you and it helps you create scenarios and “see around the corner’, then it’s worth a try.”
Companies Who Complete Business Plans Are 2.5x as Likely to Get Funded
In the above section, Naturally if b,usiness plans prove beneficial to investors from outside and investors, they are more likely to improve one’s chances of obtaining capital successfully. A study conducted by Palo Alto Software confirms this theory. The study found that even though 70% of entrepreneurs did not have business plans, those who did have them were twice as likely to have secured financing for their ventures.
The study interviewed 287 entrepreneurs. Of them, 995 have completed their business plans, which included 297 (30 percent) with secured credit, 280 (28 percent) with fast investment capital, and 499 of them (50 50 percent) growing their companies. Compare these figures with outcomes for those entrepreneurs who had no business plans in place, and only 219 of them (12 percent) were able to secure loans, 219 (12 percent) were able to secure investment capital, and 501 (27 27 percent) were growing their businesses. (Note that the percentages for the population of business plans add to over 100 percent due to some overlap between the various sub-categories.) The study’s findings led researchers to come up with the conclusion that “Except in a few cases, business plans seemed to be in a positive correlation with business performance as assessed by our measures. Our analysis does not prove that the completion of the business plan will lead towards success; the results do suggest that an owner who follows a business plan is more likely to manage successfully a business.”