The value of writing a business plan is often debated in the entrepreneurial community.
For every successful business that was launched with a well-thought-out business plan, it seems you can find an equally successful one that was launched with nothing more than some scribbles on the back of a napkin. In fact, the contrarian approach may be the one you hear most about — i.e., entrepreneurs dismissing a business plan as something they wrote and then stuffed in the bottom of a drawer.
Palo Alto Software founder Tim Berry (a contributor here at Small Business Trends) recently reported on some new data showing the value of business plans. Palo Alto did a survey that asked thousands of its Business Plan Pro software users questions about their businesses, goals and business planning. The responses showed that those who completed business plans were nearly twice as likely to successfully grow their businesses or obtain capital as those who didn’t write a plan.
Tim gave this breakdown of the numbers:
2,877 people completed the survey. Of those, 995 had completed a plan.
- 297 of them (36%) secured a loan
- 280 of them (36%) secured investment capital
- 499 of them (64%) had grown their business
1,556 of the 2,877 had not yet completed their plan.
- 222 of them (18%) secured a loan
- 219 of them (18%) secured investment capital
- 501 of them (43%) had grown their business
Of course, as author of the original Business Plan Pro software program and founder of Palo Alto Software, Tim admits he’s a little biased in favor of business plans. And people who respond to a survey by the company that made their software may be biased in favor of saying good things. So Tim had the University of Oregon Department of Economics assess the validity of the data. Eason Ding and Tim Hursey wrote a report on the data with the supervision of Professor Joe Stone. “Results suggest that planning with software is highly correlated with subsequent successes for a variety of firms,” they wrote.
Regardless of the type of company, the growth stage of the company and the intent for the business plan, Ding and Hursey’s analysis found that writing a business plan correlated with increased success in every one of the business goals included in the study. These were: obtaining a loan, getting investment capital, making a major purchase, recruiting a new team member, thinking more strategically and growing the company.
The authors concluded:
“Except in a small number of cases, business planning appeared to be positively correlated with business success as measured by our variables. While our analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to run a successful business.”
And if I correctly interpret the last sentence in the quote above, the act of going through the business planning process may make you a better entrepreneur.
So there you have it: you’re better off WITH a business plan than without one. In fact, based on the survey, you are twice as likely to grow your business or achieve funding if you have taken the time to write a business plan.
Get the latest headlines from Small Business Trends. Follow us on Google News.
Tyler
That’s interesting, but I’m going to have to nitpick your conclusion.
The quotes you used say that there’s a correlation between writing a business plan and being successful. It seems like this data would have tremendous selection bias, so I don’t think there’s any evidence to support the claim that writing a business plan makes you any more likely to succeed.
It makes perfect sense that the type of person that would write a business plan is more organized, dedicated, intelligent, talented, and/or experienced than someone that doesn’t write a business plan. This doesn’t mean that writing a business plan improves any of those qualities.
Even still, that’s a pretty interesting study. Thanks for sharing it.
Martin Lindeskog
Do you have stats on how much they were writing business plans during the so called Dot Com era?
JL
Rieva,
No way! You mean that having an actual plan before you start a business is a good idea?
Cmon!I suppose that the next thing you’ll tell me is that Palo Alto Software makes the best of the best in business plan software!
(They do)
The Franchise King
nice post i am glad to left comment here.
Taking the time and making the effort to produce a business plan shows organization, determination and forethought. All of which would tend to preselect toward successful individuals, so I’m not sure if this is the chicken or the egg…
Harry Tucci
A great article with many truisms. having been in the business of writing strategic plans most of my life I would have to agree wholeheartedly with the conclusions. It never ceases to amaze me how many people will use GPS or Google Maps for a trip somewhere but when it comes to starting a business they think they can do it without any strategy, without any guiding road-map.
I am not saying the plan has to be set in concrete, but just like in sports where you know what the goal of the game is, in business you need to have clear idea of what you want to accomplish and then how do you wish to accomplish that goal.
Right on! Business plans are very important to success, not because they set out all the solutions to potential problems but because the process itself makes you aware of opportunities and challenges. Fore-warned is fore-armed!
Diane Helbig
This is so interesting to me. I just gave a speech about effective business planning. My premise was that unless you are looking for funding you don’t need the lengthy, detailed, business plan created by the Business Plan Pro software.
HOWEVER, you DO need a plan! How can you go anywhere if you don’t know where you are going or how you are going to get there? Business planning is critically important to business success. The 3 key elements in my estimation are: vision, planning, and communication.
Ivan @ MySoloBusiness
Biased or objective I am not surprised by the conclusion.
Demings’ Plan-Do-Check-Act cycle is a proven concept is the field of management and certainly applies to the process of setting up and developing a small business.
Without a plan, how do you know where to focus your efforts? How do you know if you’re on target? If you don’t have a business plan any result you achieve (even a poor one) is good since you don’t have a plan to compare it to.
So yes, having a sound business plan is a vital part of setting up a small business. Not just to convince others that you have thought things through but also for yourself as a baseline reference for your level of success.
Warren Williams
It’s the planning, not the plan that impacts chances of success. Those who take the time to think things through, consider consequences and alternatives, determine the definition of success and the steps necessary to reach it are significantly more prepared than those who wing it.
ClaudiaD
Ok it does seem an obvious truth. But even more important than the plan and the process of writing the plan I think, is measuring yourself up against how far you are in achieving the plan. Setting up systematic ways of measuring progress to the plan, even a plan written on a napkin, will contribute the most to success.
Claudia
Very useful survey, and another proof that business plan is important, whether it’s a one-page or 100-page plan.
Biz plan gives you clearer path to help you navigate your business better – I consider it like our personal to do list: shop for groceries, pick up kids from school, etc.
Also, it’s obvious that bizzes with biz plans will secure loans better – lenders want to know how you would use their money, and biz plan can do this for you.
Richard
Great Post. Entrepreneurs have to be excellent managers of resources — human, financial, informational, technological, material and time. If you are organized, savvy with finances
This research is a classic example of “there are lies, damnable lies, and statistics” (from Twain who got it from someone else).
My second book (to be published in December 2010) is titled “Bad Plans Carried Out Violently” and promotes the idea that DOING SOMETHING trumps pre-planning almost without exception. I’ve talked with hundreds of successful business owners and asked them four questions:
1) Did you do a business plan before you started your business?
2) If you did, how well did it project what actually happened over 1 yr, 3 yrs and 5 yrs?
3) Do you do ongoing strategic planning you fully update each quarter (this is not the classic January Business Plan or investor doc), to incorporate the feedback you get as you are doing business in the trenches?
4) If you do ongoing Strategic Planning vs. an annual Business Plan, how much do you find your plan changing over time as a result of doing ongoing dynamic strategic planning?
The number of successful business owners who do a business plan before starting their business is statistically insignificant – well less than 1%. The only reason the small minority gave for doing one is because they had to in order to get money from a bank or investor (almost no one does one just for themselves). That should tell you something about the classic “pre-planning” Business Plan we’re all taught is so important. Almost no one who is successful does one, yet we continue to pound the idea that it’s necessary.
Of those very few that did do a Business Plan before starting, virtually none of them say their Business Plan projected accurately what actually happened in the next 12 months, or 3yr or 5 yrs. To the contrary most said their Business Plan was wildly off from what actually happened in the real world. So most biz owners don’t do one, and those that do find they don’t reflect reality, yet we continue with the Business Plan mantra.
Very few biz owners do ongoing quarterly Strategic Plans, but of those that do, they are unanimous in saying that the reason they do is because business, just like life, changes so much and so rapidly, that a once a year Business Plan is useless, and that the purpose of the classic Business Plan is simply to get a loan. Otherwise it has no value in their business.
The conclusion is that successful business owners don’t do a classic Business Plan unless they are forced to by a bank or investor, and that they never look at it after that. So it clearly has value for getting a loan, but not for running a business.
The proper planning analogy (which is chapter one in my book) – planning is a rudder on a ship. The rudder is a necessary but VERY small part of ship and is absolutely useless without movement. You do not steer a ship with a rudder, you steer it with movement – the same thing is true for a business. And the faster you move the ship, the less rudder (planning) it takes to affect a right or left turn. Stop planning and get moving!
“Committed Movement in a Purposeful Direction” and “Implement Now. Perfect as You Go.” – two concepts from my book – are much more instructive to success than pre-planning. Knowing the end goal is extremely important – knowing beforehand the path for how you will get there is fortune-telling.
See the new book from 37Signals.com called “Rework” for others affirming this as well.
Hi Chuck, I agree entirely. To summarise the reason most businesses have a problem with planning is that they see it as an event when in fact its a process.
Sometimes, even the task of writing a business plan can be daunting. At the same time, it’s important to get something on paper. That’s why I created a Back of the Napkin business plan exercise – http://myshingle.com/2010/06/articles/ideas-tips/back-of-the-napkin-business-plan/ – to get down vision as well as specific tasks to accomplish
Tim Berry
My thanks to Rieva for an excellent summary of my earlier post, and thanks to all of you whose comments point out that what really matters is the planning, the planning process, the live plan that is reviewed and revised regularly according to plan vs. actual results. That becomes management, steering the business. The formal plan isn’t the point; the first plan is just the first step towards planning as steering and management.
Ironically, a lot of people who would agree with the above criticize the business plan per-se, without realizing that you can’t have planning process or management or steering without the plan as the first step. Let’s not throw out business planning just because some people stop at the end of a single plan, without following up. Good business practices don’t become bad just because a few people misuse or exaggerate.
Tim
Good points, Tim.
The problem is that the Business Plan is almost universally seen as 1) a very thorough, thick, and detailed documentation of what is supposed to happen, and 2) a static document that you might review once in a while but rarely change more than once a year.
The problem with #1 is that complexity breeds paralysis – the better we capture everything we think might happen going forward in great detail, the more likely the weight of all that detail is going to keep us from understanding the plan itself.
Simplicity breeds movement; once we got our business owners to stop doing a business plan and start doing a simple two-page strategic plan that captured the few things that really need to be done, we found they started using it because it was easily grasped and easily managed.
Perhaps most importantly (from my perspective admittedly) is that at every turn when business owners ask what’s the most important thing they should do to become successful, they are told “do a business plan”, and the examples they are given of what that means are always complex and full of “thud factor” (they make a loud noise when dropped on a table). Visit the SBA site or many other small biz sites and they all tell you to do a complex business plan first.
Where are the people telling business owners to do a very simple one or two page strategic plan for how they will sell something, and get moving. Why aren’t we focused on giving them very simple processes for doing that instead? There is much more compelling evidence that Speed of Execution creates success than does business planning, but we still tell people to sit around and think about things. It could be in fact, that the reason the study found people who finished their business plan to be more successful was simply because they have a higher Speed of Execution and get moving on everything they do, not just their plan.
If we put planning in its proper context – as a SUPPORT MECHANISM for movement, it’s a tremendous tool. But I almost never see it shared that way. It’a always some kind of magic bullet – do a Business Plan – as if writing what you think might happen someday actually makes it happen.
Movement is the gift, and planning is its faithful servant. We have these two things backwards. We worship and serve the servant and have forgotten the gift (concept borrowed from Einstein).
A business plan helps, that is for sure but needs to be well done otherwise is useless.
Then, it has to contain real market figures if you want to get some fundings from it.
You need also to be able to see outside it when starting your business as things change and you need to be able not to only stick to it.
Mark J. Denning, CPA
As a CPA and financial consultant, there is no doubt in my mind that a business plan serves as a plan, guide, feasibility study, road map, etc. It is imperative to communicating your company plan to key stakeholders – investors, bankers, managers, although the most used section is the financial section as these stakeholders want to know if the business will make profit and cashflow.
In the past 30 years, I have found it necessary to take the financial snapshot portion of the business plan and turn it into a dynamic real-time cashflow management system that is linked to historical financials and future forecasts. It then becomes the CEOs day to day financial management system, focused on both financial managing the business as proactively analyzing “what if” business decisions.
The book “Drive Your Business to Financial Success” is a quick read for small business CEOs, owners, etc. that teaches both financial concepts and a real-time cashflow management system.
Kelley Selvy
We are a non-profit lender and one of the first criteria for obtaining funding with us is a business plan. If you are going to ask someone to invest in you and your business a well thought out business plan is essential. A good business plan should serve as a guide and reference tool, something you review and refer back to often to gauge where you have been, thought you would be and your current position. I know there are many people who start and run successful businesses with no formal business plan and this is not meant to detract from their success in anyway. Even successful businesses very often need to borrow money from a lender to reach their next goal and if you do, you are going to need to present a business plan as part of the application process. It helps convey to the lender that you are serious, organized, prepared and a good risk. All good qualities in lenders eyes!
Chuck Blakeman
Kelley,
Lenders ask for business plans because they don’t usually know how to assess the likelihood of success from real world metrics/experience, etc. But that doesn’t make them a good idea, just a necessary one when dealing with a lender. But lenders should stop asking for them because they don’t have any correlation with success.
Here’s something to think about regarding whether business plans are a good way to start a business
1) Not a single Fortune 500 was started with a business plan – not one.
2) And as we research it, I’m willing to bet that not a single Fortune 5000 (or maybe no more than a handful) were started with a business plan, either.
3) After asking thousands of business owners around the world about them, only 3-6% do one if they don’t need a loan. And to date, we have yet to find a single one of these businesses that worked out anywhere close to what was in the plan.
Yet we keep trying. But there are MUCH better predictors of success that lenders could use if they understood what makes people successful and what doesn’t. Having a business plan or not having one when you start is not one of them.
T Keller
I agree with those that see the true value of a business plan as a process. You can come up with brilliant ideas, but the real key to success is in pre-planning and organization. The most important use of the business plan, other than financing, is in the planning process. It forces you to realistically assess the who, what, when, where, why, how and how much for planning and implemention of your enterprise. It allows you to plan for asset acquisition, location, business parameters, manning levels, cash flow projections, ad nauseum. Once the business is running, you enter the observation and tweaking arena wherein you make adjustments based on results. At that point the plan is not as strategically important, but there have to be controls and a means to analyze progress and implement adjustments.
Hodey
My thanks to Rieva for an excellent summary of my earlier post, and thanks to all of you whose comments point out that what really matters is the planning, the planning process, the live plan that is reviewed and revised regularly according to plan vs. actual results. That becomes management, steering the business. The formal plan isn’t the point; the first plan is just the first step towards planning as steering and management.
Ironically, a lot of people who would agree with the above criticize the business plan per-se, without realizing that you can’t have planning process or management or steering without the plan as the first step. Let’s not throw out business planning just because some people stop at the end of a single plan, without following up. Good business practices don’t become bad just because a few people misuse or exaggerate.
Alan R.
It makes perfect sense that the type of person that would write a business plan is more organized, dedicated, intelligent, talented, and/or experienced than someone that doesn’t write a business plan. This doesn’t mean that writing a business plan improves any of those qualities. The dot com era makes it double trouble.
Prince David
It’s the planning, not the plan that impacts chances of success. Those who take the time to think things through, consider consequences and alternatives, determine the definition of success and the steps necessary to reach it are significantly more prepared than those who wing it.
LogMusic
Very useful survey, and another proof that business plan is important, whether it’s a one-page or 100-page plan. Nice…
Hi Rieva, useful insights here and I linked you back as one of the more useful sources of statistics on business plan success. However I wanted to add that there are a fair amount of success factors which make or break achieving the business plan’s objective, namely founder’s performance in the credit interviews and the existence or lack thereof of supporting documents. Have a look maybe at this article we wrote, it latches onto the ideas stated in your article and might be useful to your readers:
Regards & much continued success for everyone’s projects!
Joe
Ryno Postma
Thank you for the very informative article. I noted something while pondering the numbers.
“2,877 people completed the survey. Of those, 995 had completed a plan.
297 of them (36%) secured a loan
280 of them (36%) secured investment capital
499 of them (64%) had grown their business”
If I add all of the above I get 1 076. The percentages also add to 136%. I am so sorry… I am a finance person, so understanding figures is my business :).
After reading your article I’m fully motivated. I recommend this article to my friends also thank you so much for sharing with us.
Being a writer, this article is a very needful source for me. I think I got all the information which I want to look for a search.