You’re thinking of starting a business and wondering what to do next.
Your sister tells you to “just jump in and get started. Don’t waste valuable time writing a business plan.” Your brother tells you the opposite: “Before you jump in, make sure you write a business plan to flesh out your idea.”
Who’s right? Academic research confirms that it’s your brother.
Writing a business plan, studies show, does much more than help you get financing. It helps you create a more successful company.
Hedging your bets
Studies I conducted a few years ago showed that entrepreneurs who write business plans develop their companies more quickly, have a greater chance of getting raw materials from suppliers, reach their first sale faster, are more likely to succeed at product development, and are less likely to experience failure.
Critics contend that writing a business plan does little to enhance your company’s financial performance, but then you shouldn’t expect it to. Business plans are written too early in the life of a company to affect sales or profits directly. But by helping you get your company up and running and reducing the odds that it will fail, a business plan clearly improves its long-term performance.
Reasons for success
A business plan helps you in several ways. First, it forces you to test your assumptions about how your company will work. Sometimes those assumptions are wrong, and you need to change them. For example, you assume that you should pay your sales people a salary.
But if you examine how you expect to generate sales, you see that you need to give sales people a strong incentive. Paying them a commission rather than a straight salary, it turns out, is the key to making your business model work. While you would have figured that out eventually, it’s more expensive to learn through trial and error than a test of the different assumptions in a business plan.
Second, writing down the key elements of your business in a plan helps you remember them. Take competition, for example. Many entrepreneurs become enamoured with their business ideas and pay too little attention to their competition. By writing down the names of competitors, their strengths and ways to overcome them, entrepreneurs can stay focused on how to win.
Third, writing a plan helps you identify and choose among alternatives. For example, you might have three alternative suppliers.
The cheapest has spotty quality and doesn’t offer credit. The most expensive provides excellent quality and will finance you.
The third has good quality, offers credit and charges an average price. Writing a business plan will push you to figure out which of the three is best for you. Without a plan, you might be tempted to go with the first supplier you meet and not consider other options.
Cementing your ideas
Facilitating communication is a fourth reason to write a business plan. With a well-crafted plan, you can more easily explain your business idea to suppliers, customers, even your mother-in-law. Moreover, a written business plan will help ensure that your communication and vision stay focused.
Despite such benefits, some entrepreneurs still don’t write business plans. I don’t understand why, given the research findings. Then again, I don’t understand why some people don’t wear seat belts in cars. I guess improving your odds doesn’t appeal to everyone.