It’s important to have a plan for your business, but if you’re not sure how to write one? Don’t worry: A recent study from Indiana University suggests that the best way to come up with a good plan is by just following your gut.
The scientific research also found some other interesting facts about which parts of a business plan are most effective in making people trust it– and what types of businesses tend not to need them. The study can be read here or at this link https://www.forbes.com/sites/samemcconnellan/2018/05/15/.
“Who needs a business plan?” is a question that has been asked many times. The answer to this question is yes. A recent scientific research study says that people who have a business plan are more likely to succeed than those without one. Read more in detail here: who needs a business plan.
Should you spend some time creating a business strategy or simply get started and figure things out as you go? There has been a lot of discussion about this, but no one has compiled the empirical data to establish whether or not planning is worthwhile—until now.
I’ve been looking at scholarly studies on business planning—the real science behind planning and how it affects both startups and established businesses—with the assistance of my buddy Jeff from the University of Oregon.
But, before we get into the numbers, why do we even need to look at business planning research? The majority of startup advice seems to involve drafting a business plan as an essential stage in the process. Business plans must provide value if so many people urge you to create one, right?
Well, there’s been a lot of debate regarding the usefulness of business plans in recent years. When people look at successful businesses that haven’t developed business plans, they assume that planning is a waste of time.
Taking the time to plan is, after all, a trade-off. Time spent preparing may be better spent developing your business. Instead of spending the time to develop a plan and understand your assumptions about how your firm may expand, why not simply “get started” and learn as you go?
According to the study, the discussion isn’t actually about whether to “create a plan” or “don’t write a plan.” What counts most is the kind of planning you undertake and how much time you devote to it.
Continue reading to discover:
- How much of an effect can planning have on companies that invest the time to do it?
- How your business’s capacity to obtain funds is influenced by your strategy.
- When should you begin the planning process?
- What measures can you take to lower your risk of failure?
Companies that plan ahead may develop 30% quicker.
One study (1) from 2010 analyzed data on the development of 11,046 businesses and found that planning increased company success. Surprisingly, the same research found that planning helped established businesses even more than it did startups.
However, the research does not provide a solution to the issue it raises:
Why would a company with a few years of experience benefit from planning more than one that is just getting started?
The reason for this is that established companies have a better understanding of their consumers and their requirements than a fresh company. Planning for an established company requires fewer guesses or assumptions to be proved, so the plans they create are more informed.
According to another research (2), businesses that plan develop 30% quicker than those that don’t. This research discovered that although many companies may succeed without planning, those that do plan grow quicker and are more successful than those that don’t.
Another research (3) showed that fast-growing businesses (those with revenue growth of more than 92 percent from one year to the next) often had business strategies. In fact, 71% of fast-growing businesses have strategies in place. They make budgets, establish sales targets, and keep track of their marketing and sales efforts. These businesses don’t necessarily refer to their plans as “business plans,” but rather as “strategic plans,” “growth plans,” and “operational plans.” It’s all forward-thinking planning, regardless of the label.
Take action: Establish aside some time to set objectives and develop a business strategy. More importantly, revisit and modify your strategy as your company grows and you learn more about your consumers.
Business planning isn’t something you do just when you’re getting your company off the ground. It should be something you go back to time after time to modify and enhance depending on fresh information.
The plan’s quality is crucial.
But it’s not as straightforward as it seems. Simply having a strategy in place does not ensure quicker development. What counts is the kind of strategy you have and how you utilize it.
Startups, particularly those developing highly creative companies, should design shorter, less thorough strategies, it turns out (4). This is because these forward-thinking businesses are always learning new things about their products and consumers, and their tactics are changing at a faster rate. Simpler plans—Lean Plans that fit on a single page—are updated more often and are more useful to these businesses since they can quickly assess their approach.
Meanwhile, more established businesses have a better understanding of their goods and consumers, allowing them to develop more comprehensive plans that are less likely to alter. More thorough planning is usually more beneficial for these businesses.
And it’s not only the plan’s magnitude that counts. What you include in your strategy is also crucial.
The same research that showed that businesses develop faster when they have a strategy also found that firms who do a good job articulating their value proposition perform even better than those that struggle to define their consumers’ requirements.
These researchers also discovered that having a plan is more about establishing regular objectives, monitoring your real progress toward those goals, and making adjustments to your company as you learn more about your consumers than it is about correctly forecasting the future. Pivoting is a term used by Silicon Valley companies to describe the process of shifting strategic direction. Simply said, you must be agile, keep your eyes open, and be ready to make adjustments in your company when you compare your actual outcomes to your objectives and collect more input from your consumers.
Action: Instead of a 40-page business plan, concentrate on simplified planning that outlines your objectives and details the requirements of your consumers. As you get a better understanding of your company, make adjustments to your strategy on a regular basis.
When it comes to obtaining financing, being prepared is crucial.
You hear venture capitalists speak about how important the team is in a financing decision over and over again. Beyond the staff, you’ll hear them discuss passion—how strongly the entrepreneur believes in the concept.
However, it turns out that something other than enthusiasm influences VCs’ choices. According to research (5), how well an entrepreneur is prepared is much more essential than how passionate they are.
This is not to say that VCs will demand a business plan. In fact, they are unlikely to request one.
What this implies is that entrepreneurs must have done some kind of preparation in order to be able to speak intelligently about their concept, target market, sales and marketing strategy, and so on.
As a result, when pitching VCs, the traditional 40-page business plan paper may not be helpful. However, you should have done some preparation so that you can convey what would usually be contained in that written document orally or via a pitch deck.
Not only can business planning assist you in being better prepared, but it will also increase your chances of receiving funding. According to a research conducted by the University of Oregon (6), companies that have a strategy are much more likely to get financing than those who do not.
Take action: Get to know your company inside and out. Create an internal document to record your approach, but save the time and work of producing a well-crafted business plan paper.
It is critical to begin preparing as soon as possible; the sooner you begin, the better.
So, if business planning improves your chances of success and even helps you expand quicker, when should you start working on one?
Entrepreneurs who began the company planning process early were better at what scientists term “creating legitimacy,” according to research (7). This is a fancy way of stating that these entrepreneurs utilized business planning to begin the process of communicating with prospective consumers, engaging with business partners, looking for financing, and collecting other information they needed to launch their company.
Entrepreneurs who used their business strategy to “establish legitimacy” early in the process were more likely to succeed, and their companies lasted longer.
Furthermore, beginning the planning phase before beginning marketing activities or speaking with consumers lowers the chance of a company failing (8).
Planning, on the other hand, should never take the place of engaging with consumers. You must speak to your prospective consumers as part of a continuous planning process—one in which the plan is continually updated as new information is gathered—to learn more about what they need, what they are prepared to spend, and how you can best reach them.
Action: Begin the planning process as soon as possible. Even if you just create a basic elevator pitch to test your concept, it will help you start a discussion with prospective consumers and kick-start your company.
You are more likely to start your company if you plan ahead.
If you’re like myself, and most entrepreneurs, you like coming up with fresh company concepts. You’re always coming up with fresh ideas on how to enhance current companies and address new issues.
However, the majority of such fantasies never come true. They live on in your mind as ideas, while other entrepreneurs perceive an opportunity and figure out how to make it happen.
It turns out that more of your ideas can be turned into a profitable company. According to a research published in Small Business Economics, entrepreneurs who take the time to write a business plan are 152 percent more likely to start their company (9). Not only that, but entrepreneurs that have a strategy are 129 percent more likely to take their company beyond the start-up stage and develop it. Another research showed that entrepreneurs who have a strategy are 260 percent more likely to start their companies than those who don’t (10).
Surprisingly, entrepreneurs who create strategies are 271 percent more likely to shut a company. This sounds paradoxical in light of the statistics above, but it makes a lot of sense when you think about it.
Entrepreneurs who have a plan monitor their progress on a regular basis. They can see when things aren’t going as planned, such as when sales aren’t reaching expectations or marketing tactics aren’t working. They recognize when it’s time to move away and attempt something new rather than riding the company to its demise, which might be catastrophic.
Action: If you’re serious about starting a company, start writing down your objectives and strategies. Even if it’s only a one-page business plan, it’ll help you get started more quickly. And, after you’ve started, keep note of your progress so you know when to shift gears and attempt something new.
If you have a plan, you are less likely to fail.
Nothing can guarantee that your business will succeed, but it turns out that having a strategy may help mitigate your risks.
Another research of 223 businesses showed that having a strategy decreased the chances of a company failing. Unfortunately, having a strategy did not ensure success. Companies that had a strategy, on the other hand, had a higher chance of success than those that did not.
Having a plan and updating it on a regular basis implies you’re keeping track of your progress and making changes as needed. You’ll know if anything isn’t functioning. And you’ll know what to do more of if things are going well.
Build a plan, but don’t simply put it away in a drawer. Keep track of your progress to determine whether you’re on track to meet your objectives. Your strategy will assist you in determining what is and is not working in order to expand your company.
The kind of planning you undertake will determine your success.
Creating a company strategy seems to be common sense in the end. Would you go on a vacation without knowing where you’re going and how to get there?
It’s encouraging to find that research supports these common sense beliefs. The study also supports the notion that the usefulness of business planning is highly dependent on how it is approached.
It’s not a matter of whether or not you should plan; it’s a matter of what type of planning you do. Iterative planning is the most effective; it is kept alive and adapts.
It’s not about foretelling the future like a circus fortune teller. Instead, it’s a tool for fine-tuning and adapting your strategy as you go, allowing you to continue to understand your market as it evolves and tailoring your company to your consumers’ ever-changing requirements.
Starting with a Lean Plan is a good place to start. It’s a simplified method of planning in which you start by writing out your company idea on a single page, which I refer to as a “pitch.” Iterate, collect feedback, and tweak your strategy as required. You may create a business plan paper if you’re requested to, but it’s not necessary for your long-term success.
Check out our collection of over 500 free example business plans if you need some ideas.
Finally, I’d want to express my gratitude to Jeff Gish of the University of Oregon, who was very helpful in collecting and evaluating the material for this paper.
What has been your previous experience with business planning? Will you take a different approach to planning in the future? Tell me @noahparsons on Twitter.
References:
1 J. Brinckmann, D. Grichnik, and D. Kapsa (2010). Should business owners prepare ahead or simply go for broke? A meta-analysis of contextual variables influencing the connection between business planning and success in small businesses. doi: 10.1016/j.jbusvent.2008.10.007 Journal of Business Venturing, 25(1), 24-40
2 Burke, A., Fraser, S., and Greene, F. J. Burke, A., Fraser, S., and Greene, F. J. (2010). The impact of business planning on the success of new ventures. 391-415 in Journal of Management Studies, vol. 47, no. 3.
3 N. Upton, E. J. Teal, and J. T. Felan (2001). Fast-growing family businesses’ strategic and business planning methods. 60-72 in Journal of Small Business Management, vol. 39, no. 1.
4 M. Gruber (2007). A process and contingency perspective on the usefulness of planning in new venture development. 782-807 in Journal of Business Venturing, 22(6). http://dx.doi.org/10.1016/j.jbusvent.2006.07.001
5 Chen, X.-P., Yao, X., and Kotha, S. Chen, X.-P., Yao, X., and Kotha, S. (2009). A persuasive study of venture capitalists’ financing choices based on entrepreneur enthusiasm and readiness in business plan presentations. The Academy of Management Journal, vol. 52, no. 1, pp. 199-214.
6 E. Ding and T. Hursey (2010). Palo Alto’s Company Plan Pro was used to assess the efficacy of business planning. Economics is a department that studies economics. The University of Oregon is located in Eugene, Oregon.
7 F. Delmar and S. Shane (2004). Organizing operations and the survival of new enterprises comes first. 385-410 in Journal of Business Venturing, doi: 10.1016/s0883-9026(03)00037-5.
8 S. Shane and F. Delmar (2004). Market planning entails the preparation of a business strategy prior to marketing and the continuing of organizational activities. 767-785 in Journal of Business Venturing, doi: 10.1016/j.jbusvent.2003.11.001
9 D. M. Hechavarria, M. Renko, and C. H. Matthews (2011). Goals, entrepreneurial self-efficacy, and start-up results in the fledgling entrepreneurship hub Small Business Economics, vol. 39, no. 3, pp. 687–701, doi: 10.1007/s11187-011-9355-2.
10 J. Liao and W. B. Gartner (2006). The impact of the timing of pre-venture plans and perceived environmental uncertainty on emerging company persistence. Small Business Economics, vol. 27, no. 1, pages 23-40, doi: 10.1007/s11187-006-0020-0.
The “do i need a business plan” is an interesting question. The answer to this question is yes, you do need a business plan. This doesn’t mean that you need a detailed one though.
Frequently Asked Questions
Is a business plan really necessary?
A: If you do not have a plan, you will never know if your idea is viable. Without a plan, it can be difficult to determine how much capital or time an endeavor might take and what the potential profitability could be.
Why is through research necessary for a business plan?
A: Through research, you can identify your target market and the opportunity area. This will help you to decide what angles of marketing are liked by consumers and which ones arent. From there, it is important for a business plan to set out how these opportunities would be reached in order to maximize profits from them.
Is it possible to build an actual business without a business plan?
A: Unfortunately, no. Business plans are extremely important for large companies to make sure that they have a strategic plan and detailed steps in place on how exactly their company will grow. Without this information it is nearly impossible to build a successful business let alone one with revenue streams, as well as the resources necessary for running such an operation.
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