There are many different aspects that make up a good business plan. Rich & Gumpert (1985) suggest that “physically putting a business plan together requires the entrepreneur to translate the vision of the new venture and how it will perform into a format that is dictated, in large part, by the audience.”

This post sets out to identify the reasons why businesses need a business plan and tries to explore what determines a successful business plan and how to achieve it.

Why do you write a business plan?
Rich & Gumpert (1985) state that when developing a business plan, “it is important to satisfy the needs of marketers and investors. Marketers want to see evidence of customer interest and a viable market. Investors want to know when they can cash out and how good the financial projections are.” I think that Rich & Gumpert have made a fair statement but I also believe that a business plan is not purely a document for raising capital. The underpinning research required to develop a business plan allows the entrepreneur to take a multi-dimensional view of their business which gives them a great insight on areas such as how big their potential market is, how much it might be worth and how they are going to get to it.

Research undertaken on a business plan must be done thoroughly and when possible should have input from external sources. Rich & Gumpert provided a good example of analysis gone wrong in their paper titled ‘How to write a winning business plan’ (Harvard Business Review, 1985) when they said “…he reasoned that he could have 170,000 customers if he penetrated even 1% of the market of 17 million small enterprises in the United States. The panel pointed out that anywhere from 11 million to 14 million of such so-called small businesses were really sole proprietorships or part-time businesses.”

One of the key factors in the failure of my first venture, Cerberus Technology, was that because I was struggling so hard to bring in work and trying to make wages I did not put enough time and effort into having an outward view of the company. I know now that planning is a key part of business survival (and one’s sanity).

In researching this paper I found a quote that I wish I had read 7 years ago, it said “Write your business plans by looking outward to your key constituencies rather than looking inward at what suits you best. You will save valuable time and energy this way and improve your chances of winning investors and customers.” (Rich & Gumpert, 1985)

Businesses are destined to fail without proper planning. It’s similarly like trying to drive to the Giant Lobster blindfolded. You have no idea which roads to take, if there is anyone else in your space, what speed you are doing or how much fuel you have. Ansoff (1991) said it best when he stated “planning generally produces better results than does trial-and-error learning.”

Investors, angels and venture capitalists use the business plan during their deal-screening process. Deal screening is defined as: “The initial decision process by a venture capital firm where many entrepreneurial business plans are screened down to a few that are deemed to have high probability of success and warrant further due diligence.” (Hindle, K & Mainprize, B, 2006)

Rich & Gumpert (1985) suggest, “Without a plan furnished in advance, many investor groups won’t even grant an interview.” The reason for this is because most venture capital firms only have a few partners, yet they receive hundreds even thousands of business plans. Realistically, venture capitalists are only likely to invest in 1 out of every 100 that they screen. This means that not only must the business plan be thoroughly researched, it must be presented in a way that catches their interest and makes them want to know more.

What will determine success of a business plan?
Rich & Gumpert (1985) state that a business plan must accurately reflect the following viewpoints:

1. The market, including both existing and prospective clients, customers, and users of the planned product or service.
2. The investors, whether of financial or other resources.
3. The producer, whether the entrepreneur or the inventor.”

I would argue that although a business plan requires those vital areas, it is simply not enough. I believe Hindle & Mainprize (2006) presented the strongest thesis where they said that a “business plan has two fundamental purposes:

1. Communication – business plans must be a tool that clearly communicates the future and its uncertainty
2. Credibility – business plans must portray credibility by providing for revision and iteration.”

The business plan is the first point of contact for the entrepreneur when trying to raise money. This means that the entrepreneur must be able to clearly communicate their passion, vision, purpose and goals through a document that should not exceed 40 pages.

In a sense, the business plan must be written in a language that the venture capitalist can understand without exerting too much mental capacity. Hindle (1997) believes that the communication mandate of the business plan is to “anticipate the target investor’s due diligence questions and provide answers to them before they are asked”.

The entrepreneur must also be willing to stand by his actions and yet, be able to back down when he has been proven wrong. Hindle (1997) says that the initial version of a business plan “assumes the role of the opening address in a constructive dialogue; not final oracular proclamation requiring only assent or dissent”.

Hindle (1997) also states that an effective business plan has the capacity to enable the target investor to “gain flexible perspectives on the desirability and feasibility of the new venture”.

Companies must be flexible in order to move with the markets; therefore entrepreneurs must understand the need for flexibility in their business plan. Hindle (1997) states that a business plan “which presents a ‘take it or leave it’ set of propositions or has its financial forecasts ‘set in cement’ has a high likelihood of failure”.

A prime example of this type of flexibility is the Nokia Corporation. Nokia began in the late 1800’s as a paper mill, then at the turn of the century moved into electricity generation. Throughout the 1900’s Nokia delved into many markets including cables, televisions, consumer electronics, military equipment and personal computers. Finally in the 1990’s Nokia focused solely on the telecommunications markets. Because of Nokia’s everlasting flexibility and entrepreneurship, they have been a successful company for 144 years.

Summary
Without proper planning, a business can only have a very short view of where they are headed and how they are going to get there. Hindle (1997) states that without a business plan, “new ventures are likely to be stillborn through a lack of ability to attract vital physical and financial resources”. What Hindle is really stating is that no respective venture capitalist or investor will give you an audience without first screening you and your company through your business plan.

Hindle & Mainprize (2006) believe that improving the communication and credibility aspects of a business plan could have the potential to improve the likelihood that the plan passes the venture capital deal-screening process.
“Only a well conceived and well-packaged plan can win the necessary investment and support for your idea.” (Rich, S & Gumpert, D, 1985)

By Matt Leeburn, August 2009