The Value of Writing a Business Plan

Keith McBride on August 29, 2013 in Entrepreneurship

I would say that I have a plethora of problems with the premise behind this article.

The author, Kevin Johnson, describes himself as a successful serial entrepreneur — someone who  starts multiple new businesses to see if something profitable can be built up from a single idea.  I love people like that.  They exude creativity, optimism and excitement.  I’ve had the privilege of working with a few of these folks, but they are rare.

Johnson’s article seems to assume that prospective business owners understand entrepreneurship as well as they understand their own business or industry.  There is a huge difference between the two, and I would argue that most entrepreneurs do not have a comparable grasp on them both.  The reality is that while most entrepreneurs are knowledgeable and experienced at making the “widget” around which their business revolves, they are not equally experienced and confident about what it takes to build a start-up into a viable business.   And that’s not their fault; most have never tried to do it before, and haven’t seen what goes into it (unlike Mr. Johnson).

When a prospective new business owner comes to me, they usually have a strong feel for the direct costs associated with creating their widget.  They have thought about their customer base and sales revenues, and based on that, they have an idea of how much money they can spend on rent/employees/equipment/etc., and how much start-up money they will need to borrow from a bank.  It’s rarely accurate, but it’s a start.

When I ask if they’ve done the financial projections on paper to support their conclusions, they give me this look:

Uh oh.

(Forgive the cartoon example.  I have two young children.)

It is vital for any new business to have an understanding of their total costs and their potential for profitability.  Will they know it with take-it-to-the-bank confidence after doing a business plan?  Johnson would say “no,” and I would agree.  But that doesn’t mean the exercise of projecting costs and revenues has no value.

The truth is that writing, revising and polishing a business plan is not about having a finished product that will operate as perfect predictor of future performance, nor is it meant to bind the business owner to only the activities, expenses and strategies contemplated in the plan.  The value of writing a business plan is in the journey, not in the destination.

Johnson goes on to suggest questions that an entrepreneur should ask before writing a business plan, but then says, “too much emphasis is still placed on writing a business plan when you have an idea.”  Why doesn’t he seem to understand that the process of asking questions and gathering information (as per his suggestion) IS the writing process?   I would suggest he change the title of this article to “The Business Plan Written Without any Preparation, Market Research or Reliable Information Gathering is Overrated.”  Then, I wouldn’t have such a problem with his premise.

A potential business owner who puts in the time and effort it takes to write a proper business plan emerges from the process with a much more complete understanding of their market, their total costs, their strengths, and what challenges they will need to overcome to succeed.  It can help an overly ambitious entrepreneur understand that he or she will need to scale down the initial phase of their business and to develop a growth strategy that their revenue will support.  Likewise, it can help the risk averse owner see that the only way to earn sustainable profits on their product may be to produce them on a larger scale.

For me, suggesting that someone create a business plan implies that they do it correctly and completely.  Like so many other things, its value is directly correlated to the amount of effort put in to it.  And especially for someone not familiar with entrepreneurship and starting-up, there is a lot of value in it.