Introduction
There are as many different opinions about how to write a business plan than there are entrepreneurs who do not even use one to run their business. It is no surprise, however, that without a business plan, “new ventures are likely to be stillborn through a lack of ability to attract vital physical and financial resources” (Hindle 1997).
While business plans differ between different organisations, the principles of devising the plan generally remain consistent. Some factors likely to affect the style of a business plan include answering these questions: Who the plan is being prepared for; the type of business involved; who are the customers; what is the business model; what is the size of the business; the reason the plan is being prepared; and the time available to prepare the plan.
While these questions could be simply answered in order to devise a business plan, there is, however, little empirical evidence to show the correlation between a good business plan and a successful business venture. Sahlman (1997) pointed out that business plans ranked no higher than 2 (on a scale of 1 to 10) as a predictor of a new venture’s success.
Indeed, Hindle and Mainprize (2006) was critical of the vast majority of the abundant literature on how to write a successful business plan as the authors considered that they were not research-based, and proffered a research based guide to writers of entrepreneurial business plans.
This paper focuses not only on what makes a good business plan but what makes a great business plan in the context of the entrepreneurial venture.
Rationale of writing a business plan
A business plan in hand is like a street directory to a destination. A good business plan, however, provides a snapshot of the journey in the future. It gives the entrepreneur confidence in pursuing his or her opportunity despite a lack of resources (Hindle and Mainprize 2006). It also gives the entrepreneur a document to secure from prospective investors financial resources for the proposed venture.
On the other side of the scale, a good entrepreneurial business plan gives the investor the ability to “screen down” the opportunity to a few that are deemed to have a high probability of success and therefore warrant further due diligence (Hindle and Mainprize 2006). Thus, the ultimate goal of a business plan is to get a deal from the right investor.
Many business plans, however, are written without any consistency and accuracy in the information being presented. Sahlman (1997) considered that one of the many sins committed by the writer was arrogance. He said that “a business plan must not be an albatross that hangs around the neck of the entrepreneurial team dragging it into oblivion. Instead, a business plan must be a call for action …”.
Therefore, writing a good and effective business plan is as much an art as it is a science (Rich and Gumpert 1985).
The literature reviewed for this paper set out a common thread about the objectives of a business plan. Consistently, a business plan was seen as a document used to communicate a message in order to secure a financial resource. It is often the case that to have a plan is better than not to have one. A plan generally produces better results than trial and error learning (Ansoff 1991). However, many of the literature reviewed suggest a “how to” approach with a formulae framework without giving sufficient emphasis on tailoring the plan to the type of ventures and its possible stages of growth.
So, what then determines the success of a business plan ?
Success of a business plan
Most people would agree that a well crafted business plan is one of the keys to success. Therefore, careful preparation by the entrepreneur is vital as it represents an unique opportunity to consider all facets of the venture (Timmons 1980).
Sahlman (1997) likened business to playing chess: to be successful, one must anticipate several moves in advance. In order to understand the process that goes into writing a good business plan, Sahlman proposed a framework for assessing four independent factors critical to every new venture.
These factors are: The People; The Opportunity; The Context; and The Risk and Reward. He was of the view that these were the ingredients of success, and crafting a business plan to thoroughly and candidly address these factors was vital. Therefore, the key to a successful new business is assembling a competent team, marshalling the appropriate resources, and executing its strategy in an environment that demands constant reassessment of the opportunity and realignment of the resources (Sahlman, Stevenson, Roberts, Bhide 1999). These things must be crafted in the business plan, but foremost is to present the people who will make it happen.
Jim Collins (2001) in his best seller book “Good to Great” restated the old adage by saying that people are not your most important asset but the right people are. Sahlman’s (1997) reference to Arthur Rock, a venture capital legend, stating that “I invest in people, not ideas” supports this fundamental approach.
Therefore, a critical element of any business plan must be about the credibility of the people involved. Do they have the necessary skills, knowledge, ability and experience to enhance the probability of success of the venture they are proposing ? Communicating the venture is more likely to be seen as secondary. Therefore, not giving sufficient weight about the people involved in preparing a business plan would likely cause failure either in the funding pitch or in the execution of the business process.
Hindle (2007) pointed out that “credibility of an entrepreneurial business plan is achieved if the document effectively matches the resources of the entrepreneurial team’s needs with the expectations and criteria of the investor. For an entrepreneurial venture, it is important to communicate effectively between the resources sought and the control and allocation of these resources in order to achieve the targets set out in the business planSahlman (1997) .
Having established the credibility of the people who will make the venture a success, the ability to communicate a clear message regarding the future and its uncertainty is also critical (Hindle and Mainprize 2006). Too often, a business plan focuses on the rosy future, supported by financially engineered numbers. Very little thought goes into the key drivers of the venture’s success or failures. A well crafted business plan would be candid in addressing the opportunity of the venture, and balancing the potential rewards with the high degree of risks associated with achieving the objectives.
While the right team would give the venture a higher probability of success, the business plan must anticipate the tough questions to be posed by investors, and provide solid answers. Sahlman (1997) rightly pointed out that “investors feel a lot better about risk if the venture’s end game was (sic) discussed up front … a business plan should be the place where that map is drawn, for, as every traveler knows, a journey is a lot less risky when you have directions”.
Thus, addressing the potential good and bad news cannot be avoided. More importantly in a well crafted business plan there would be potential solutions proffered as a contingency plan.
Conclusion
Entrepreneurial ventures carry with it a very high degree of risk. Avoiding risks is impossible. It is often said that one ought to take “calculated risks”. A good business plan will have all the sort of ingredients of success as propounded by Sahlman (1997), and the constituencies as proffered by Rich and Gumpert (1985).
However, a great business plan is one that embraces the characteristics of simplicity, candidness, fairness and reasonableness. It is bullish about the future, yet conservative and realistic about its journey to the future. It does not just plan for the long term or focus on the short term (Moore 2007). As Sahlman (1997) pointed out “a ‘good business’ (sic) plan must demonstrate mastery of the entire entrepreneurial process, from identification of opportunity to harvest.”
Ultimately, it is not so much about writing a business plan that is important. It is the detailed analysis of one’s business which has to be undertaken before that would determine success of a business plan.
References
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