Business Planning for Entrepreneurs

Is the traditional business plan the right choice?
We are all told that we need a business plan, but do we? Is this corporate-world tool still relevant to entrepreneurs wanting to exploit their opportunity in the 21st century? Entrepreneurial educators the world over, including me, have built their courses on the premise we do and there is no shortage of books and consultants prepared to take our money in order to deliver one. Business planning is essential but is the Traditional Business Plan the right tool or is it actually counter productive?

Introduction – Business Planning

 It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage, than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones

A quote by Niccolo Machiavelli (1469) sets the stage in this age for an article that I am sure will emulate all the emotions he has identified above. [1]

Background Business Planning

Entrepreneurs that are actively engaged in the field of opportunity exploitation generally view business planning in accordance with the military maxim that;

“All plans are great … until the first shot is fired.”

This is not to say that these entrepreneurs do not value planning – they DO! But they tend to share the same view as General Dwight D. Eisenhower, who in his role as US President and military campaigner said;

“Plans are worthless but the planning is essential”[2]

A study by Professor Amarnath V. Bhide, from the Columbia Business School USA whose research on entrepreneurial planning is encapsulated in his book The Origin and Evolution of New Businesses (Oxford University Press, 1999), supports this view with a study of the 2002 Inc500. This study revealed that 60% of these successful entrepreneurial enterprises did not begin with a traditional written business plan and more than half of those that did, strayed significantly from their original concept anyway. [3]

He goes on to say that this characteristic is not unique to this group but is supported widely by his research that only about 33% successful entrepreneurs prepared a traditional written business plan. The likes of Bill Gates (Microsoft), Sam Walton (Wal-Mart), Michael Dell (Dell Computers), Larry Page and Sergey Brinand (Google), Steve Jobs and Steven Wozniak (Apple) and Jann Wenner (Rolling Stone magazine) are typical members of the ‘no traditional written plan’ club and yet they each obviously undertook the necessary planning to create their successful enterprises.

A study of 116 ventures conducted by the professors Julian Lange and William Bygrave from the highly respected entrepreneurial school in the US, Babson College, concluded that there is no evidence linking the performance of a new venture to whether it was based on a written business plan or not [4] 

The trouble is, the traditional business plan has become big business in its own right. It has become the ‘go to’ competency for educators and facilitator of entrepreneurial programs the world over. Authors continue to publish books about the topic and consultants continue to deliver them to clients for a significant fee. But is it the missing step that leads to success for an entrepreneur or is it just a crutch, a distraction or a time filler when either the entrepreneur or their business model lacks conviction?

Planning, the pillar underpinning any successful endeavour is not under attack here. What is under attack is the way in which one method, the traditional business plan, is promoted as the only authorised version that should be adopted regardless of the enterprise status or development. So, the argument is not about enterprise planning – that is accepted by entrepreneurs as being essential. The question being put is whether entrepreneurs should write a formal business plan using the traditional educational and business model that is promoted by most educational institutions and consultants.

Traditional business plan outline

So what is the traditional business plan. There are many and a google search will reveal. One example that provides assistance in the writing of a traditional business plan can be found at the US Government’s National Telecommunications and Information Administration web site. [5] Their suggested outline of a traditional business plan includes;

COVER SHEET – (Name(s) of principles(s); name, address and phone # of business)

STATEMENT OF PURPOSE
TABLE OF CONTENTS
I. THE BUSINESS
A. Description of the Business
B. The Market
C. Competition and Feasibility Study
D. Location of Business
E. Management
F. Personnel
G. Application and Expected Effect of Loan or Investment
H. Summary
II. FINANCIAL DATA
A. Sources and Application of Funding
B. Capital Equipment and Furniture Lists
C. Projected Balance Sheet
D. Break-even Analysis
E. Projected Income Statements
F. Cash Flow Projections
 III. SUPPORTING DOCUMENTS
(Personal resumés, job descriptions, personal financial statements, credit reports, letter of reference, letters of intent, leases, contracts, other legal documents, and anything else of relevance to the plan.)
  
In my opinion, when it comes to new enterprise planning, the traditional written business plan does not adequately meet the needs of the entrepreneur. The keynote reason for this is that the traditional written business plan is not reflective of the way entrepreneurs think about, act on or exploit opportunities. I believe that entrepreneurs are better served by an Entrepreneurial Strategic Action Plan (which I will outline later) that is less operational and more strategic in nature, more isolated parts informing the whole, more flexible than structured using a more holistic, summative, adaptive and directional approach.
To a large extent the traditional written business plan is a product and instrument used by large corporations with their risk aversion culture and predictive modeling and is not necessarily designed for the risk acceptance and ‘trial and learning’ attitudes of the entrepreneur. Anyway much of the new generation of entrepreneurs do not fit previous assumptions. Take the case of the increased entrepreneurial activity of GenY. They are just doing it. Starting from an experiment, huge enterprises are built. See the video for more.
Some commentators have cynically suggested that asking for a traditional written business plan, after a short interview, is the least painful way for investors and bankers to say no to the action oriented entrepreneurs. They know the life sapping demand they are making and that they may never need to face that entrepreneur again to say no to their face. However, this action propagates the myth that the perfect business plan will translate into securing perfect resources for the perfect business. Unfortunately, this is just not the case with an accepted belief in the industry that only 5% of business plans are ever read anyway. Still, it does create a large consumer demand for the traditional written business plan that educational instructions and consulting enterprises are only too happy to fulfill.
“A plan is just part of the planning process” PJB

Effectual Vs Predictive business planning

Research conducted in 1997 by Saras D. Sarasvathy, associate professor of the University of Virginia, into 30 founders of high capital value enterprises, concluded that these entrepreneurs used an effectual rather than a predictive (Causal) reasoning when transforming their ideas into an enduring firm. Yet it is the causal reasoning that is the underlying philosophy behind the formation of the traditional business plan (Take a pre-determined goal and given a set of means, identify the best (cheapest, fastest, most efficient) way to achieve that given goal).

Effectual reasoning [7] is in fact the opposite of casual reasoning in that it begins with a set of means and allows the goals to emerge contingently over time. It could be argued that causal reasoning is best suited for those generals seeking to conquer fertile lands whilst effectual reasoning is best suited for explorers setting out on voyages into uncharted waters. The latter better reflects the mindset of the entrepreneur whilst the former reflects the business manager or strategist’s in existing enterprises, for whilst causal reasoning promotes careful planning and subsequent execution, effectual reasoning lives and breathes execution that ultimately informs the right plan.

Effectual reasoning needs to be highly creative and requires as core competencies – imagination, spontaneity, risk-taking and salesmanship. Effectual reasoning reverses the norm in that it promotes ‘ready – fire – aim’. Effectual reasoning develops the meaningful picture and the compelling story and then through execution allows the surprise discoveries to shape the clearly achievable and desirable goals. Effectual reasoning focuses more on affordable loss not on expected return, on strategic partnerships not competitive analysis and on turning the chance happenings to advantage over exploiting pre-existing knowledge.

Where causal reasoning goes to great lengths to avoid surprises, effectual reasoning embraces it. Causal reasoning attempts to predict the future in order to control it whereas effectual reasoning attempts to control the future thereby negating the need to predict it. For business planning to be effective for entrepreneurs it needs to adopt the effectual approach to problem solving and not simply adopt the causal approach that whilst useful for existing enterprises, it is not appropriate for entrepreneurs exploring the unpredictability of new products in new markets.

“Specific goals are sometimes a dangerous thing – they set limits to our life possibilities and give a bias outlook to all future opportunities” PJB

Traditional business plan – It’s not the answer

The following factors also contribute significantly to the inadequacy of the traditional written business plan as a planning tool for entrepreneurs;

      1. You can’t research new – The foundation stone for the traditional business plan is market research but most new opportunities for entrepreneurs are created in worlds characterised by great turbulence and considerable change. Consequently, it is extremely difficult to do business planning research on fast changing and evolving markets. There is just not any meaningful data in these markets which leads entrepreneurs to value the ‘trial and error’ (effectual) approach far more than the goal, research and analysis approach required of a traditional written business plan.
      2. Change is inevitable – Experienced entrepreneurs know and accept that entrepreneurial business enterprises change and morph substantially in the foundation stages until they eventually settle on their sustainable growth path. They know and accept that a percentage of their plan will not work but it is impossible for them to identify in the planning phase which parts these will be. They know that there are just too many variables in resources, market acceptances, product developments and the entrepreneur themselves to predict meaningfully in detail over the traditional 3-5 year business plan. Entrepreneurs rely more on their ability to adapt to the changing environment as it evolves than carrying out the detailed instructions of an operational plan fundamentally created in ignorance.
      3. Windows of opportunity close quickly – Entrepreneurs know better than most that timing is everything. All opportunities have a trigger point where action and commitment is required for that opportunity to be exploited. They know that ‘windows of opportunity’ are fleeting and require timely action or they can be lost forever. They believe that the cost of devoting scarce resources to researching and writing a traditional business plan is greater than the any benefit received, particularly if a ‘first mover advantage’ in the marketplace is lost due to this usually 3-6month delay.
      4. The plan is already in play – Over 70% of successful entrepreneurial enterprises are started by current domain experts who have directly experienced the pain of a particular problem for which they have come up with a solution. This experience usually occurred while working for someone else or with a previous employer. These entrepreneurs question the need or value of writing a traditional business plan and are more likely to use their insider knowledge and experience and strategic alliances to firstly evaluate the opportunity and then to take it to market via their highly accessible distribution channels.
      5. Planning tools should not be so rigid – The traditional business plan presents as a ‘one size fits all’. How many entrepreneurs have struggled with the templates asking question about the past performance of the business or the current status in terms of operations. The traditional business plan has a bias towards an existing business going forward and is not well structured for an ‘idea whose time has come’, as it is for most entrepreneurs.
      6. Getting it wrong is no great loss – The advent of the internet as a means of business entry has made the cost of being wrong almost negligible. Through the medium of eBay, on-line marketing and the like, products and services can be tried and tested in the ‘real world’ prior to any significant commitment of resources. This allows for the process of modification and adaptation of the business model to meet the market needs ‘on the fly’ and so creates a far more commercially proven business plan (proof of concept) than the traditional generally untested written ones. These entrepreneurs focus on an affordable loss approach rather than get carried away by the ‘blue sky’ estimates of traditional business plans.
      7. Its a bad sell strategy – Imagine the photocopy sales person trying to make a sale by placing the 100 page manual on the desk of the prospective buyer and standing back waiting for the cheque. Adopt this approach with your traditional business plan and you and the photocopy sales person are going home the same way – empty. Think about the last time you purchased anything of note; How much information did you need before you parted with your money? What were the key issues you wanted resolved before you purchased? What aspects triggered your confidence to make the purchase? The answers to these questions will guide you in deciding the level and style of planning and presentation you should adopt for your new venture.
      8. It proves nothing – Well, it does prove that you can prepare a good traditional business plan, but what about preparing what is really important – a good cashflow. As a proof of concept tool, there are far more convincing methods that you could adopt. (A web site collecting email addresses of interested buyers for you product, a prototype already in the market under limited release, customer lists and testimonials, embedded release with a key strategic partner, customer and supplier support).
“The planning process is essential if you want to know what to do when things don’t go according to plan” PJB

‘The Art of the Start’ – Say NO to the business plan

The serial entrepreneur, author and former Apple Fellow, Guy Kawasaki, describes in his book, “The Art of the Start”, the urge that entrepreneurs have to write a business plan, craft a pitch and build financial projections as “Wrong, wrong, wrong!”. His step 3 in starting a new venture is to just GET GOING. Whilst not denigrating the need for plans, pitches and projections he explains that it is not the time to be doing this if you are serious about making the start.

In Guy Kawasaki‟s opinion most business plans are “a piece of [rubbish]”. He describes them as “sixty pages long, fifty-page appendix, full of buzzwords, acronyms, and superficialities”. Guy Kawasaki recommends writing a short business plan of about 20 pages but only after first perfecting a pitch based on a slide presentation: “Give the pitch a few times, see what works and what doesn’t, change the pitch, and then write the plan.”

Getting going for him is all about implementation – “building the prototype, writing the software, launching the web site or offering the services”. He goes on to say that “The hardest thing about getting started is getting started … Remember: No one ever achieved success by planning for gold”. Click here to read a manifesto of the book The Art of the Start

Traditional business plan – It’s limited usefulness

In spite of the argument detailed above, there are some cases in entrepreneurial endeavour where the traditional written business plan could be of value but completing it still provides no guarantee of business success.

  1. First timers –  if this is a first time venture into the world of entrepreneurial endeavour then it is could be useful for the novice entrepreneur to go through the process, in theory at least, of developing a commercial idea and taking it to market. The traditional written business plan does guide a forced thinking of all the elements that make for a sustainable business and can provide a vehicle to secure feedback from experienced operators to find weaknesses, opportunities, unsupportable assumptions and over optimism contained in the plan. However, the danger is that the new entrant, instead of gaining the confidence to act, will actually imbibe the old adage of ‘paralyses by analysis.’ The other danger is that there is so much emphasis placed on writing the traditional business plan for new entrants that creating the perfect business plan becomes an end in itself rather than creating what is really needed – the perfect cashflow.
  2. Stakeholder requirements – As mentioned earlier, external stakeholders may expect it. These stakeholders may be bankers, Government Agencies, joint venture partners, silent partners/angel investors, mentors/advisors, key employees and even family & friends. Where a significant capital outlay is required by these external stakeholders then a traditional written business plan is considered mandatory in order to gain a sustainable advantage over others in securing capital and assets. However, I would argue that there are far better planning models but sadly this group of stakeholders are more likely to favour tradition over better. Anyway, entrepreneurs tend to start their enterprises very small with the means close to hand moving directly into action without elaborate planning. So, they have no need, in the early stages as least, for external stakeholders that are not part of the entrepreneur’s social and professional networks.

Variations on the Traditional Business Plan

In continuing the research done by Professor Amarnath V. Bhide, various other authors and entrepreneurial advisors world wide are beginning to promote the concept that the traditional written business plan is no longer a prerequisite to obtaining investment financing or succeeding in the entrepreneurial world.

 David E. Gumpert, the respected author and co-author of four books on business planning for startups including the classic Business Plans That Win $$$, has released his latest book Burn Your Business Plan! What Investors Really Want from Entrepreneurs Lauson Publishing Company 2003 [6]. He takes up a provocative view of the business startup process and argues that writing a business plan unnecessarily wastes time and, in fact, could be counterproductive. Like Professor Amarnath V. Bhide he sites examples of entrepreneurs that are raising funds and launching successful businesses without adhering to the conventional wisdom of preparing a detailed written business plan.
He offers a new paradigm for attracting investment, as well as guidance for alternative approaches to impressing investors. These he argues could be preparing an effective oral presentation, writing a clear and compelling synopsis, exploring multiple ways of demonstrating demand, developing a web site that captures a business model and assembling hard-hitting financial projections.
Furthermore, Tim Burns in his book entrepreneurship.com Dearborn Trade, 2001 [8] takes the case against the traditional written business plan a step further arguing that all that is needed for entrepreneurs is a 10 slide PowerPoint presentation that encapsulates the business model and ultimately informs a 1-2 page executive summary together with the 60-second story of your business. He refers to this variation of the traditional written business plan as the e-Plan which he states was developed from the work of the venture capitalist guru, David Cowan from Bessemer Venture Partners

Tim Burns explains that “The e-plan helps you capture your vision while providing a flexible platform for responding to the inevitable changes and shifts in the economy.” He explains that the emphasis in the new economy should not be on preparing the 100-page business plan that flushes out every conceivable detail but on the execution of your business model via a flexible approach in development and by thinking through the key strategic issues.

He puts forward the case that everything in commerce has speeded up and that business plans need follow suit by being streamlined for both ease of manufacture and speed of digestion. He believes that the advantages of this approach are a quick yet comprehensive understanding of the business model, an inbuilt flexibility to change direction quickly in accordance with the marketplace evolutions and that it provides a ready presentation for stakeholders that he believes are more likely to respond to a visual/verbal plan than a written one.
The slide titles that he develops for the business plan are:
                      1. Name of Company
                      2. Mission Statement
                      3. Management Team
                      4. Market
                      5. Industry
                      6. Pain — The Market Opportunity
                      7. Solution
                      8. Marketing Plan
                      9. Financial Projections and
                      10. Valuation Analysis.
In discussing the issue of audiences he argues that “The main audience for your e-plan is you. First and foremost, the e-plan is a way of quickly capturing your vision and putting it in a format for execution. The plan has to make sense to you and guide you in propelling your vision into reality.” Follow-up audiences include potential investors followed by potential employees, suppliers, and affiliates.
David Cowan from Bessemer Venture Partners states the following in support of Tim Burn’s work;”I’m often asked what I look for in a business plan… The answer lies in the pages of Tim Burns’ book.” [9]
Joe Kremer from the Wisconsin Angel Network is also a fan of the e-plan, claiming it to be more timely, cost-effective and impressive than the traditional written one. His organisation demonstrates many fine examples of the e-plan and demonstrates some ‘How to’ applications on their website. [10]

The seasoned and active entrepreneurs from the organisation Startupjunkies also promote the fact that the traditional written business plan is just not meeting the needs of the entrepreneur. They recommend;

(1) a well thought out business model and
(2) an expanded executive summary of 3-5 pages.
They argue that if these two items are not sufficient to win the cooperation of prospective strategic partners, customers, and investors, then nothing will be. On their website [11] they

also promote the concept that there are actually four types of business plan that an entrepreneur could prepare, each serving a different purpose:


  1. The “Idea” Business Plan:

    Basically, an extended executive summary ranging from 5 to 10 pages where you describe your venture in broad strokes and what will be required to make it happen. The objective is to answer the question to yourself concerning the feasibility of the idea. If your venture doesn’t need outside capital then this version of the business plan is all that’s required in most instances.

  2. The “Equity Financing” Business Plan: This highly polished, flawless, attractive 20-35 page document is used to persuade equity partners to invest. The objective is to sell a potential investor on the value of a ‘show & tell’ meeting with you. It conveys “opportunity, urgency, and competence in a dignified and professional manner”.
  3. The “Operating” Business Plan: This plan develops over time and never actually stops evolving. It contains the details and benchmarks documenting exactly how to operate your business from launch date to maturity.
  4. The “Bank Loan” Business Plan: This cautious and conservative version of the business plan is used to apply for a loan and focuses on persuading the banker that you can satisfy their lending criteria through historical financial ratios, collateral and operating covenants

Even Tim Berry (founder of Palo Alto) who has been an expert guide to many small businesses with his various traditional business planning books and software for the past 20 years has recognised the need to develop a new flexible planning method which he calls the ‘Plan-as-you-go’ Business Plan. [12]

Options for entrepreneurs

Whatever planning tool an entrepreneur uses, it must as a minimum reflect the way in which entrepreneurs develop and exploit opportunities (effectual approach). This means that the planning process should build momentum towards launch and not bog it down in the details that are more important later in the enterprise development. 

Entrepreneurs want a planning tool that helps them create, conceptualize and clarify the idea for themselves firstly so that they can then passionately communicate it to key stakeholders.  The planning should be less about controlling existing worlds and more about creating new ones. It needs to accommodate the the entrepreneur’s ambiguity, sixth-sense and hunches with a work towards goals and objectives at a much later time in the process. It must enhance the entrepreneur’s win-win story. The plan should be directed to the critical factors of success and be strategic rather than operational in focus.  It should be detailed on the things that matter (steps to launch & plans to sustainability) whilst applying a broad brush to most everything else. It must believe that recourses are more likely to follow a great team with an ordinary idea than a great idea with an ordinary team.

According to Professor Saras D. Sarasvathy Ph.D, it should encapsulate the ‘effectual’ reasoning and be built on the key entrepreneurial means of:

    1. Who they are (Their traits, tastes and abilities)
    2. What they know (Their education, training, expertise and experience)
    3. Whom they know (Their social and professional networks)
So, I propose that a better planning tool for entrepreneurs is an Entrepreneurial Strategic Action Plan. The ESA Plan has three main elements
              1. An oral presentation consisting of 15-20 PowerPoints that details the new venture’s business model – i.e the opportunity and the plans to exploit it. (skeleton)
              2. An entrepreneurial prospectus that provides the key details relating to the venture – including sections on preliminaries, the opportunity, the concept outline, the business model, an executive summary, launch action plans with an accompanying deal sheet if required. (flesh)
              3. 20+ start-point worksheeets that analyse, clarify and inform the two presentations detailed above. These worksheets should follow the entrepreneurial development thinking being – Need – Idea – Opportunity – Business Concept – Business Model – Entrepreneurial Strategic Action Plan. These worksheets are only for internal use but will prove handy as external stakeholders probe for analysis and answers. (interrogate)
I will detail the ESA Plan on a new Knol shortly.

About the author

These days Peter Baskerville likes to call himself a New Venture Architect. This is because he is keen to impart the knowledge and insights he has gained from establishing over 13 new ventures (involving over 30 outlets) to help budding entrepreneurs of today design and build successful new ventures.
As a teacher, mentor and coach to hundreds of ‘real world’ new venture intenders, Peter now wishes to share his expertise with the millions of intenders scattered across the globe who have been brought together via the medium of the internet. He has contributed many works on entrepreneurship here on Knol and on other content publishing platforms. He fully intends to continue expanding this body of work as well as provide value-added resources via his website, designed to help people start and succeed in their own business.

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