Business Advice

Why is a business plan important?

Luisa Ddakis | 28 September 2021 | 3 years ago

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:

Source: Sean Heberling, Finance Expert

Tips for writing an excellent business plan

We cannot now plunge into a crash course on how to write a quality business plan as that is not the focus of this article. However, it is possible to share strategic, experience-based advice from experts who have formulated it from decades of experience with startups. The experts include Heberling and Thomas Harrison, Chairman of Diversified Agency Services, the latter having purchased a vast number of businesses.

Business plan writing guides

There are four main sections in a quality business plan:

  1. Company overview
  • This is where you:
  • Explain why your company is relevant in the current market, as well as what need are you addressing.
  • Give a description of your business priorities.
  • Describe how you are going to achieve the priorities.
  • Give an overview of your available resources, including headcount, required to meet customer needs.
  1. Market overview
  • Insert the research conducted on your market and the important, related trends.
  • Write up a detailed description of customers in your target market.
  • Insert the research conducted on your competitors, their unique selling points and their strengths.
  • Clearly indicate which competitor will be superseded by your business.
  1. Product/service overview
  • This is where you:
  • Give an in-depth description of:
  • Your wonderful products and their unique selling points,
  • How the product will match or outdo your competitors,
  • What market need is addressed by your product.
  • Give a quantified explanation of why people will pay for your brilliant product or service. This is conspicuous in its absence from some of the current, very expensive unicorns.
  • As an example, Uber and Tesla are bleeding money on rapidly growing sales because the products are deemed not to have fair economic value. On the other hand, sales are soaring due to slashed prices.
  1. Financial projections
There are three approaches you can take with your detailed financial plans:

  • Conservative
  • Moderate
  • Optimistic
Each of these financial plan approaches should still include realistic and achievable sales, margins, costs, as well as the profits projected for monthly, quarterly, and annual milestones. Unfortunately, these elements are sorely missing from the plans of the current very expensive unicorns.

Final advice

A final piece of advice from the experts on business plans is that detailed and written business plans are far more powerful and effective than those just outlined, such as those in a pitch deck. Heberling, when wearing the cap of “adjunct professor of finance for Villanova University”, tasks his students with writing research reports before creating the presentation slide decks of their findings. The students learn that the process of writing actually forces them to question themselves on how they came to their main conclusions as well as their sub-conclusions.

  • Support with facts
This is a default outcome of them being forced to demonstrate their logic to cynical readers. The conclusions need to be supported with facts and good logic to show that sweeping, hollow assumptions are not being made nor the usage of popular “myths.”

  • The more detail the better
Outlined reports and outlined business plans are often read quickly without deep scrutiny, and the depth and quality research put into their creation are unquantifiable. Detailed, written business plans are therefore superior to outlined versions.

  • Accompany your business plan with a summarised presentation
Outlined plans are usually presented in 10-12 slides. This slide deck is a vital component in a capital raising process, but the outline should summarise a detailed, written business plan that is ready for handing over at the pitch meeting. This will be the USP of the entrepreneur from their hoards elbowing their way towards the funds.

Conclusion

There is a popular argument out in the entrepreneurial marketplace that there are a number of listed, multi-billion-dollar companies that did not produce formal business plans before they launched, e.g. Apple, Google.

  • You can’t get venture capital with a business plan
As with many popular arguments, passed by word of mouth and not based on direct involvement in research, there is a flaw. Most of these ‘non-business-plan’ billion-dollar companies might not have had a business plan from day one, but they most definitely developed business plans when hunting down venture capital or when preparing the company to go public.

Both tech giants, Apple and Google, were beneficiaries of venture capital, and they would not have been able to solicit venture capital without business planning. The founders, Steve Jobs, Steve Wozniak, and Ronald Wayne of Apple and Larry Page and Sergey Brin of Google, would have, without a doubt, created financial projections, market segmentation, competitor analyses, as well as outlined strategic paths.

  • Lengthy business planning is needed for going public
In addition, by being public companies Apple and Google would have involved a very lengthy, very complex process of business planning. The business plans would have been used by Underwriters who employ research analysts to create financial forecasts. Those forecasts are directly based on the company’s business plans created by the management of the companies going public. Furthermore, buy-side firms create forecasts based upon the aforementioned business plans when they want to purchase or are already holding shares in newly public companies.

  • Grow your probability of success tenfold
Back to our opening question: Why is a business plan important? You don’t need a written business plan in order to be successful; however, your probability of success skyrockets with a business plan. Are you prepared to take that gamble with your future?

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