Business Advice · 28 September 2021

Why is a business plan important?

Why is a business plan important?

The importance of business plans is talked about regularly in commerce discussions, but it can make some people’s hearts sink. It is a time-intensive and complex process to work through, which leads to business plans often being avoided.

Instead of waxing lyrical about the benefits of a business plan, let’s look at hard data to quantify the effects of a business plan.

In brief, a business plan is a powerful document that lays out the goals of a business and details the financial outcomes and needs, the way to achieve the goals and the projected budgets. It is your map to success – or is it? First, let’s dive into the hard data.

The source of the data

Sean Heberling is a chartered financial analyst who has worked with market-leading companies like Morgan Stanley and BNY Mellon. In addition to analysing over ten thousand companies and designing complex business models, he has facilitated financial transactions worth over USD1 billion. Additionally, as a director on multiple boards, he advises on financial modelling, investor pitches, investment decisions, and mergers and acquisitions.

We have used the facts from Heberling’s analysis of diverse, cross-industry businesses and that of other business experts to assess the return-on-investment value of a business plan.

What do the experts say?

Globally, all business experts support the creation of business plans based on their data analysis which shows:

  • Writing a business plan makes it 250% more likely you will start a business (Panel Study of Entrepreneurial Dynamics research program, University of Michigan).
  • Angel investors and venture capitalists favour pitch decks that have accompanying business plans, resulting in a 250% increase in the likelihood of winning funding.
There are many reasons why writing business plans might be a catalyst for starting a business. A Clemson University Entrepreneurship Professor, William Gartner, commented that “research shows that business plans are all about walking the walk”. They walk the walk of market research, preparing projections and assessing risks and, therefore, have more chance of pressing the launch button.

Business plans empower corporate executives

A study by McKinsey & Company revealed that business plans provide noticeable assistance in keeping each team member aligned, making the management of the business easier and increases executive job satisfaction. Seventy-nine per cent of managerial respondents in the study said that formal planning was a significant catalyst in strategy development.

Questioning from another angle showed that, within companies that had no formal business plan process, fifty-one per cent of managerial respondents were dissatisfied with the approach to strategy development. However, within companies that had a formal process, only twenty per cent of the managerial respondents were dissatisfied.

It is vital to be conscious of the quality of planning – a token attempt at planning does not create the same results. The McKinsey study also showed that only 23% of the respondents said that major strategic decisions were made within the parameters of the business plan. This does not undervalue the need for a planning process; rather, it raises questions about the quality of the business plan. The more time and effort put into a well-written and well-researched business plan, the greater its influence going forward.

What do Angel Investors and Venture Capitalists say about business plans?

A deeper understanding 

Sean Heberling sees business plans as a crucial tool for increasing your chances of winning investments. A quality business plan gives investors a deeper understanding of your business and shows that you have carefully assessed the value, challenges and opportunities.

Explore different scenarios 

Nathan Beckford, CFA and CEO of FounderSuite, has raised over $750 million in funding. Beckford ran a previous business, VentureArchetypes.com, which created top-quality business plans for investment pitches by startups. In the mid-2000s, business plans dropped in popularity as the ‘Lean Startup’ methodology became trendy with detailed financial models. However, Beckford still values the contemplative and strategic process demanded by a business plan before launching a startup. The benefit Beckfords sees is in the modelling of different scenarios and the increased awareness of your risks and your preparation for them.

Beckford continually interacts with thousands of entrepreneurs working through capital campaigns. His perspective on the approaches that work and don’t work is priceless; hence, his assessment of a business plan as a benefit should be highly valued.

The data behind the increase in funding chances

Research by Palo Alto Software, Oregon, USA, showed that:

  • Sixty-five per cent of entrepreneurs did not have completed business plans.
  • Entrepreneurs who had completed business plans were two times more successful in pitches for funding.
The study had 2,877 participants (entrepreneurs), of whom 995 had compiled business plans:

  • Thirty per cent secured loans.
  • Twenty-eight per cent of them secured investment capital.
  • Fifty per cent grew their businesses.
On the other end of the spectrum, the figures show that of the 1,882 participants (entrepreneurs) without business plans:

  • Twelve per cent secured loans.
  • Twelve per cent secured investment capital.
  • Twenty-seven per cent had grown their businesses.
Percentages sum to over 100% due to sub-category overlap.

The study authors concluded that completing a business plan won’t guarantee success, but it indicates that the kind of entrepreneur who completes a business plan is more likely to be a successful business person.

What is the tangible financial return on business plans?

Heberling says that despite overwhelming evidence, startups, in the majority, struggle with the concept of a business plan, and especially with the notion of hiring an expert to help them create it.

To help with tangible quantifications of this expert advice, Heberling has run the numbers on data collated over his many years of business consulting. The results show two overall conclusions:

  • The ability to afford a finance expert at GBP138/hour is achievable by small-scale early-stage companies. This expert will create a business plan and guide the capital-raising process. The worst-case scenario will be a “break-even” on the investment.
  • Huge returns, as much as 6700%, can be expected when larger early-stage companies invest in business planning.
Heberling used the following inputs:

  • 25 to 200 hours per plan creating business plans for hundreds of clients such as founders, advisors, and investors.
  • The previously mentioned Palo Alto research data.
  • An average of 150 – 200 hours per funding round, communicating with investors on early-stage companies.
  • Brokers that facilitate capital raising can charge up to 10% of the capital raised.
  • Therefore, the following assumption was made. An early-stage company would pay the greater of either:
  • A finance expert at an hourly for 150 to 200 hours per round of financing, OR
  • 10% of the amount of capital raised.
Heberling’s analysis shows additional conclusions:

  • Early-stage companies should budget for GBP2,900 – GBP29,000 on business planning (financial modelling included).
  • Early-stage companies should budget for GBP21,700 – GBP145,000 for the first round of financing (GBP180,000 to GBP1.45 million).
  • A small-scale, early-stage business wanting GBP180,000, with a budget of GBP29,000 for business planning and GBP29,000 for capital raising, can expect to “break-even” based on the probability factors because:
  • A professional business plan gives a 250 per cent greater chance of finding success without including additional odds for success from using an expert in the fundraising effort.
  • Using an expert in fundraising may increase the likelihood of success by 60 to 500 per cent.
Note: A smaller business usually requires significantly fewer hours to create a business plan and raise capital than the amount used in the worst-case scenario calculation.

When the target capital amount dramatically exceeds the investment on business planning, the potential ROI is huge (and this is with all the business plan costs absorbed into round one). Larger early-stage businesses, therefore, benefit the most from the impressive probability-weighted ROI from business planning.

A table of the analysis:


 
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