A Written Cash Flow Plan Is Also Known As Are Business Plans a Waste of Time?

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Are Business Plans a Waste of Time?

I recently attended a national entrepreneurship conference with several other college professors and well-known entrepreneurs. I found it interesting that the two concurrent sessions offered contrasting perspectives on business plans. One session featured a panel of successful entrepreneurs questioning the real-world relevance of business plans. The second session focused on teaching students to develop business plans quickly and accurately.

The session I attended was intrigued by the panel discussions. None of the entrepreneurs on the panel had ever written a business plan—at least to start a business—yet all of them were wildly successful. It’s not surprising to discover that they didn’t use written plans, most entrepreneurs don’t. One of the reasons given by the panel for abandoning a formal business plan is the natural tendency of entrepreneurs to stick to a written business plan because of the investment of time and effort. The reality, he said, is that things change so much in the real world of business that the assumptions underlying the business plan must often be changed or abandoned in order to provide the flexibility necessary for the business to survive. In addition, entrepreneurs are adamant that a good plan will not make a bad idea work, and that a good idea may not be hindered by a poorly written plan—or no plan at all. Another concept discussed in this session is that what the entrepreneur is really selling to the venture capitalist or angel investor is the entrepreneur. One panelist commented, “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 ideas. They must be convinced that the entrepreneur is persistent and capable of making good decisions and making adjustments to move the business forward. Since there were college professors present, and most entrepreneurship programs require written plans, all the entrepreneurs on the panel diplomatically agreed that requiring a business plan as part of a course or program of study is not a waste of time. He agreed that the process itself can provide valuable insights.

As a college entrepreneurship instructor, I try to be realistic about the realities entrepreneurs face. After attending this conference, I realized that students may have difficulty reconciling the two conflicting approaches presented in the workshop. Surely my students are aware of the statistics that indicate that most entrepreneurs enter business without a written plan. It would be unfair to try to convince them otherwise. Why bother with a business plan if the panel is right? I believe the answer can be found in the last straw offered by the panel of entrepreneurs; This is the most beneficial process.

The planning process does not start with a business plan. In fact, writing a plan too early is a mistake. A feasibility analysis should be done before writing the plan so that key assumptions in the plan are properly investigated. Research conducted as part of a feasibility analysis can lead entrepreneurs to better understand their business. For example, using a focus group to better understand a target market can yield new insights that can lead to the development of a more competitive business model. The most important elements of a business plan are the results of the feasibility study and the explanation of an attractive and competitive business model. These facts, along with cash flow analysis, can be critical when procuring the resources needed to start a new venture.

Another point I like to share with my students is that the importance of a business plan depends on the type of business. A retail store with large capital requirements, inventory, payroll, etc. is completely different from a new venture in a technology-based industry that is rapidly changing and evolving. A business like Facebook, for example, needs far less of a formal business plan than the owner of a new sporting goods store.

Additionally, the amount of loan capital required to start a business will affect the need for a formal plan. Venture capitalists will want to review at least some sections of the formal plan as part of their due diligence.

I believe there was a valid point about the tendency for entrepreneurs to become overly attached to a formal plan. A critical time comes when a business is launched and the entrepreneur starts getting real feedback from customers. Decisions taken at such times can make the difference between success and failure of a venture. Should the entrepreneur stick to the plan’s assumptions or make minor or major adjustments? An entrepreneur needs to remember that a business is not on autopilot because only a polished business plan exists. Adjustments must be made as conditions warrant.

The panel was not wrong in questioning the need for a formal business plan, but the planning process is different from a plan. A business plan, whether required or not, enables entrepreneurs to better articulate their vision which can make writing a plan worthwhile.

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