Despite the prevailing wisdom, I simply do not believe that business plans do much to help startup entrepreneurs. In my experience, they merely serve as a way to show outsiders that you’re serious about your company. Otherwise, they have very little benefit.
There is a tremendous difference between where a business starts and where it ends. In the early stages of a business, entrepreneurs have to make significant leaps in virtually every area of the business: the product, pricing, marketing and distribution will all have to be tweaked. The necessity of rapid-fire adaptation at the startup stage makes it so that business plans are almost always outdated from the very minute they’re committed to paper.
Let’s take the example of a lemonade stand. We know that we’re probably going to need lemons, sugar, cups and a table. We could probably commit those material costs to some kind of plan. However, what about the price at which we sell the lemonade? The location of the stand? The marketing tactics we use? These are elements of the business that can (and must) change daily, until we figure out what works and what doesn’t. A business plan could actually set an entrepreneur back significantly; it imposes unnecessary restrictions on the entrepreneur, replacing creativity and experimentation with rigidity. Creating a business plan implies that the entrepreneur can adequately prepare for the major components of their business. This is simply not the case for startups.
But suppose that lemonade stand were in business 3 years? At that time, the owners probably know the correct price of the glasses of lemonade, the best location, and the best types of employees. Planning for an established business, is probably a good idea, because the scope of change in an existing business is so small relative to the scope of change in an entrepreneurial business or startup. Owners of established businesses will probably have a much more refined sense of what their business is, and they will be able to plan accordingly based on the data they’ve been gathering about over a longer period of time.
The financial aspect of business planning is almost always a fool’s errand in the beginning. I remember, many years ago, building a financial model for Sageworks that forecasted huge five-year revenue figures, despite the fact that we had any revenue whatsoever. In reality, it took us about 5 years to get any sustainable revenue that could be duplicated. This is a mistake that many entrepreneurs make in the initial stages of their business. The charade usually begins on cell A1 of an excel spreadsheet and ends somewhere far out in a model that has no basis in reality at all. In every case, the very first assumption on that first cell is pulled from thin air. Granted, this is just one man’s opinion, but I’d expect that experienced entrepreneurs are nodding their head at this point. Financial modeling, at the very beginning of the business, can lead you to make decisions that are way off base.
It’s worth noting that, when deciding whether or not to create a business plan, the specific industry should be definitely be taken into consideration. For example, I ran a pressure washing business before I went to graduate school. Interestingly, because of the nature of the business, I was able to predict revenue and expenses in the very beginning much more accurately than with other businesses I’d been involved with in different industries. A little bit of planning, in this particular business, might have helped me.
I notice that many universities continue to teach entrepreneurship around business planning, and I think this is probably a disservice. Entrepreneurial training should focus on teaching future business owners how to think; entrepreneurs need to be able to rapidly test a wide variety of ideas, and then apply an incredibly discerning eye to the results in order to adopt the good ideas and toss the bad ones. In this way, the scientific method might be an effective approach to entrepreneurship. Business plans, on the other hand, are primarily used to make the case, to people like investors, that you’re “serious” about your business. Aside from being, arguably, a more professional approach to entrepreneurship, I believe that they are generally a misapplication and poor use of time. Don’t impose unnecessary restrictions on your business in the beginning. Experiment. Tweak elements of your business as much as possible. Save the business plans for when you have more data to work from.