Why Traditional Business Plans Are Becoming Useless
By Gil Gerretsen
This is the time of year when many of us are looking at the year ahead and revisiting our business plan. I suggest you don't bother! Here's why ... and what you should do instead.
I’ve learned that most entrepreneurs are optimists by nature. If we weren’t, then we'd never take the risks that go with starting a business. Whatever business concept we have, we are certain that it is quickly going to become a roaring success. Sure, we know that we’ll have to work hard for a while and iron out a few details, but we also believe with every fiber of our being that our dream will soon be realized.
However, for most startups, success seldom comes as quickly as expected, if it comes at all. In almost every case, entrepreneurs must go through a long and often painful process of testing and tweaking their business. They generally find that the concept they finally settle on often bears little resemblance to what they had in mind when they first opened their doors. They discovered that it took a lot of experimentation and real-time adjustment to develop an approach around which they could build a successful business.
In my career as a marketing consultant and mentor to many startup founders, I have seen a lot of good business ideas come and go. I've noted many lengthy business plans that seemed to have little or no correlation with ultimate success or failure. I have seen business owners invest hundreds of hours in developing intricate and thorough business plans, only to discover that reality is quickly pushing (or dragging) them in another direction.
Once written, the carefully crafted plan almost universally gets put on a dusty shelf and is eventually discarded while the business founder reacts to the reality of changing market forces. I have found that most entrepreneurs seldom refer back to their business plan because the world changes so quickly around them. New realities leave the business plan far behind within just a month or two. Most entrepreneurs discover that it takes entirely too much work to keep the plan up to date and relevant. So why bother?
So, if no one benefits from a business plan, why do we continue to do it?
The stark answer is that most entrepreneurs DON'T bother unless they need financial help. Only then will they work through the tedious process. The business plan document is more for the pleasure and security of investors or bankers than it is for the owner. I have seen many eloquent business plans that were designed only for the purpose of securing financial support. The plan was designed more to sell the possibility for a safe and promising return on investment. It was never perceived as a working document.
The business plan was created because the banker said that they wanted to see one. Why? I have met few bankers or investors that have based their loan agreement or denial on not much more than the executive summary and the financial projections. Most admit they never read the full document. They cannot justify the time required to read and critique an in-depth business plan just to make the size of loan needed by the typical small or medium-sized business. The truth of the matter appears to be that if you have a long and carefully crafted business plan, then the banker makes the emotional decision that you have done your homework and are a better candidate for a loan. They feel safe as long as your pro-forma numbers look good.
The banker or investor often does not know enough about a particular industry or opportunity to accurately understand whether the assumptions made are valid or realistic. In far too many cases, the projections I have seen were closer to pipe dreams than they were to the reality that subsequently unfolded. This happens even when entrepreneurs create three sets of forecasts: worst-case, probable, and stretch. What really happens is still far from the image printed in the business plan.
So, is there a better way? The answer is short and sweet. Yes!
To succeed in business, you must first get the concept down and then you can begin building up your business over time. You need to follow the same process with every business, unless you get lucky, in which case you will probably draw the wrong conclusions and make some colossal errors later.
The OPBP: In developing your start-up or expansion growth plan, I've long utilized a tool call "The One Page Business Plan" by Jim Horan. He has a great workbook which you can acquire via Amazon.
The MAP: After the One Page Business Plan, you should create a 1-2 page Marketing Action Plan (MAP) and Calendar. If you're not familiar with the tool, I teach the process of creating one here. The MAP summarizes in point form how you will go about acquiring new customers and keeping the ones you have. It will also clarify where you will spend money and why.
Every business begins as a puzzle. Unless the pieces just happen to fall into place (a rare experience), you need to spend an extended period of time identifying the pieces and putting them together in a way that creates a meaningful image. The only way to do that is through experimentation and letting the market give you the answer. You must find a business formula that you can use to build a solid base of repeat customers. Once you have outlined the key tactical elements, put them on a sliding month-by-month calendar (1-2 pages) for easy review and adjustment.
The R12: Finally, every new and expanding business has a limited amount of money to work with. The key is to make it last long enough for you to get through the “proving process.” Too many entrepreneurs start out with big plans and develop emotional comfort with the expenses they see as necessary to achieve their dream. They fail because their expenses are not in line with the “proving process.” It is always wiser to spend behind the growth curve than ahead of it. History has proven that it is always better to be catching up with sales than paring back resources in crisis mode. To manage the cash, create a rolling 12-month (R12) cash flow plan showing anticipated revenues and expenses and how you will manage the expenses in relation to the revenues that actually develop. This is also covered in the link mentioned above.
There is a risk to the tinkering process. If you keep changing too many things, then your marketplace gets confused. The key to your success is building a loyal customer base. Any changes you make should be focused on that objective. Too many entrepreneurs become bored with repetition and often begin to make changes just to push away their boredom. That's a sure way to stop your forward progress. Stick with what works and let it blossom. Although you may be bored with certain elements, it is that reliability and consistency that keeps your customers coming back. You need to stay with your ship and see how far it goes.
By their very nature, most entrepreneurs have trouble maintaining focus. They see opportunity everywhere and tend to forget that there are two limited resources … time and money. You cannot afford to waste either one at any time. When growth opportunities present themselves, both resources are often stretched to the limit. By creating these "living documents" instead of a stuffy business plan, you will find it easier to keep your focus and adjust to inevitable market shifts without losing your way.