Why is a Business Plan important? Science gives you the answer
We asked science for help to define in more detail the strategic role of the business plan in the growth and development process of a company It is one of the most debated topics and on which everyone has their opinion. But, although many authoritative sources can be cited, in support or against, there has never been scientific proof that established without ifs and without but how necessary the business plan is. At least so far.
Because a business plan can add value. Still, many businesses have achieved tremendous success without ever having developed one. So let's go back to the hypothesis that drawing up a business plan is just a waste of time?
It can be said that spending time on the business plan is a form of opportunity cost, a choice between two possibilities (do it or not), in which the loss in value of one constitutes an increase in value in another.
The time spent on the business plan could be used in other ways - for example in research and development, or in marketing activities - which in turn are necessary for the company, so why it might not be as effective to let things go wrong. bike and adapt the strategy according to how things evolve, rather than relying on forecasts and statistics?
The point is not to "write" or "not to write" a business plan. What really matters is what kind of planning you can do and how much time it will cost you to do it.
We will therefore try to demonstrate:
- How much and how spending time on the business plan can affect a business activity;
- How much and how planning affects the ability to profit from your business;
- When is the right time to start the planning process;
- What are the steps to take to reduce the margin of error.
- Planning can help a business grow up to 30% faster
After analyzing the growth rate of 11,046 companies, a study published in 2010 in the Journal of Business Venturing showed that, where it was carried out, planning actually incentivized company performance. It should be emphasized that the same study also established that planning has benefited not only start-ups but also - and even to a greater extent - already established companies.
This study, however, does not answer the question it raises itself: why is the drafting of a business plan even more useful for companies that have already started up than for startups?
Let's try to provide an answer: a company already started and with its own history certainly has a greater knowledge of its customers and their needs than a start-up. For an existing business, planning means relying less on assumptions and forecasts to validate, and consequently setting your strategy on concrete information.
Another study, also from 2010, published this time in the Journal of Management Studies , showed that companies that have set up a business plan have grown by + 30% compared to those that have not . Of course, a multitude of companies have achieved success even without a business plan, but in any case not on time and at the levels of those who did it.
Just to highlight the link between planning and speed of growth, the Journal of Small Business Management published in 2001 a study according to which 71% of companies with the highest growth rate (in the order of 92% on an annual basis) used a business plan. They set budgets, identified sales targets, carefully planned and documented marketing activities and business strategies. In many cases they did not even use the term "business plan", but in fact they planned strategy, growth, operations with a medium and long term vision.
Take the time to set your goals and set a plan for your business. And most importantly, check and update your business plan as your business grows and as you become familiar with your industry and customers.
Business planning is not a one-off activity to be carried out only when you start a new business venture, but it is something to periodically return to, to review, optimize and recalibrate based on the new information you will obtain from the performance of your business.
Having a business plan is not enough to guarantee the success of a company. You need a good business plan. It is the quality of the business plan that makes the difference.
It is quite common for startups, especially those born on highly innovative ideas and products, to develop relatively little detailed, shorter and "light" business plans. Finding themselves in the situation of getting to know their product and their customers very quickly, they have to change their strategy more frequently. Their business plans, therefore, are necessarily lean , usually do not take up more than a single page and are reviewed and updated often, allowing you to check and change the strategy in the blink of an eye.
On the other hand, companies that have already started up have greater knowledge about products and customers, and can therefore build more complex and detailed strategies, which will need to be updated less frequently. A more structured and long-term business plan, therefore, will be the most suitable for this type of reality.
But of course it's not just about the size of the business plan, but its contents. The study of the Journal of Management Studies we talked about - the one on the relationship between the speed of growth and the use of a business plan - also found that companies that have been able to better define their value proposition have had better results than those that have spent more time defining the needs of their customers.
Having a good business plan, therefore, does not simply mean knowing how to make accurate forecasts, but also and above all setting - and resetting - goals, monitoring progress towards their achievement, adapting the business model as knowledge is refined. of customers and their needs. Among Silicon Valley firms, knowing how to change their strategic direction is called “pivoting”. In short, it means remaining vigilant and with a flexible attitude, oriented to change your business thanks to the constant comparison of results against current objectives and information obtained from customer feedback.
Don't try to come up with a 40-page business plan, but focus on simpler and more agile planning, defining your goals and the needs of your customers. Periodically review and adapt your business plan based on how your business is performing and what you learn day after day.
Being prepared makes a difference, especially if you are looking for funds
According to most venture capitalists, what most influences the disbursement of a loan is the composition of the team. After the team, there is passion, or how much the entrepreneur believes in his idea. There is no doubt that both of these elements can influence the decision of venture capitalists to finance a project. But a 2009 study in the Academy of Management Journal shows that a trained entrepreneur is more reliable than a passionate entrepreneur.
This does not mean that during the pitch with a venture capitalist you will be asked for a detailed business plan, but that you will need to be able to explain every single aspect of your idea, from the target market to the comparison with the competition, from marketing to sales strategies. . You will not be asked to recite a 40-page business plan by heart, but you may be asked for any of the details that may be contained in it.
Having prepared a business plan, therefore, will not only make you prepared, but considerably increase the chances of obtaining the desired financing.
Know in depth every aspect of your business project. Create a document for internal use in which to summarize your entire strategy, but avoid spending too much time and resources in creating a business plan that is too long and detailed.
The earlier you start planning, the better
According to a study published in 2004 in the Journal of Business Venturing, entrepreneurs who started the business planning process first performed best in what English-speaking researchers call “establishing legitimacy”. It is a way of saying that those entrepreneurs used the business planning process to initiate the process of dialogue with potential customers, of approaching work partners, of recognizing financing possibilities and collecting various other information relevant to starting their business.
Start the planning process as soon as possible. Even a simple elevator pitch, just to see how your idea “sounds”, can be of great help in dialogue with potential customers and in launching your business.
Planning is a stimulus for starting your business
Like most entrepreneurs, you too will like to dream of developing and implementing new business ideas, thinking about how to increase existing activities and look for new solutions to new challenges.
Many of these dreams are destined to remain such, remaining only ideas that blend in your head, until some other entrepreneur sees the same opportunity and finds a way to make it happen.
But there is a way for your ideas to turn into a concrete project. A study published in 2011 in Small Business Economics found that entrepreneurs who invest time in defining a business plan are up to 152% more likely to start a new business.
They are 129% more likely to start off on the right foot and quickly move from the startup phase to a growth phase.
According to another study (Small Business Economics, 2006), entrepreneurs who plan even have a 260% chance of starting a new business. But in this research there is an apparently conflicting data: the same entrepreneurs who dedicate themselves to planning are also 271% more likely to close their business.
Yet, come to think of it, it makes sense. Entrepreneurs who plan are used to constantly keeping track of the performance of their business. They are therefore well aware of when actual sales do not coincide with those expected, or when marketing strategies are not proving effective. They know when it's time to change the air and jump on new opportunities, abandoning a business idea that has started towards failure due.
If you really want to start a new business project, start writing down your goals and the strategy you intend to use to achieve them. Even a simple one-page business plan will help you get started earlier and, once you get started, monitor your performance and know if and when to change direction and try something different.
With planning, you will be less likely to fail
But having a business plan undoubtedly helps limit this risk, as demonstrated by a further study of 223 companies. Having a schedule and constantly updating it means being able to monitor the progress of your business and correct the shot from time to time. If something is wrong, you will notice.
Thanks to the business plan you will be able to understand what works and what doesn't, and optimize your business.