Thursday, August 21, 2008

When not to write your business plan

(Note: this post is geared towards the cautious entrepreneur stuck in the Preideation Phase)

Don't get me wrong, a business plan is a very useful tool and having one increases your likelihood of success. However, there is a risk of spending too much time in the Ideation 'lab,' and occasionally I advise entrepreneurs to stop work on their business plan and try starting their business in 'pilot' mode. I do this when they are putting a lot of effort into a business plan at the expense of actually getting hands-on experience, especially when the business has low startup costs. The larger the investment required to open for business, the more investment in planning is appropriate before opening for business. (Consider a restaurant vs a home-based pie business). In a nutshell, some real-life hands-on experience can be worth as much or more than all the academic research done in a vacuum. And the ideal is usually a combination of both. (Side note: An analogous dilemma is when to go to market. Consider the tech-boom trend of the vaporware software company that went to market long before the product was production ready or even coded, most of the time with a bad ending, but occasionally the right move. Release too early, and your product may flop, release too late and you've missed the market.)

Why do I really need a business plan?
As I see it, a business plan serves two purposes:
  1. A repository to store and refine all of the ideas and information that is in your head, helping you organize and recall everything related to your business and make sure you have addressed everything
  2. A tool for communicating with others - partners, investors, lenders, landlords, vendors, clients, etc.
I divide a business plan into two parts: the written description of the business typically done in Microsoft Word and the quantitative part, which primarily consists of the financial forecast or pro formas, typically done in a spreadsheet. The latter is in my opinion the more critical of the two although it is dependent upon the information in the former. For example, I've seen small business lenders spend as much or more time with a five page financial forecast than they will on a forty page written business plan.

Let's compare two pie entrepreneurs (to borrow from Michael Gerber's E-Myth series), both of whom started working on their business a year ago. The first has spent the past year continuing her Dell day job while working on her business plan, and now she knows a lot about the national pie/food industry, the local market, and general entrepreneurship, and she has a business plan that is forty pages long and very professional. Meanwhile, the second has also kept her Dell job, but she has also started making pies, and selling them starting with her friends while occasionally working on her business plan. A year later, she has:
  • A number of market-tested recipes
  • A small but loyal and growing customer base and other contacts and a growing reputation
  • A year's worth of financials (albeit small and in the red) which can be more helpful in securing capital than a business plan
  • A net financial investment that is probably slightly higher than what the first pie maker has spent on classes, books, etc. but still small, and she has only a few more hours per week
Oh, and of course, she has a much better idea of how much she likes the pie business and how good she is at it than the first pie maker has. Which of these two would you bet on?

Isn't it risky to start my business without a business plan?
Yes, and you should definitely consider the risks. Above and beyond the financial investment that is at risk, there are many pitfalls, such as rolling out a product that isn't well thought out or over committing and under-delivering. However, a business plan doesn't eliminate these risks, it only reduces them. These risks are in line with the risks (and rewards) of taking the third way instead of starting a cookie-cutter business.

One other thing to keep in mind, a business plan isn't static, it becomes outdated as soon as you put it down, so I recommend writing your plan iteratively with research and/or operations in between iterations and revisiting the plan periodically even after its initial completion.

In summary, balance timing and effort between the business plan and operating the business, but first weighing the costs and risks of moving ahead without a complete plan. If the costs and risks of 'piloting' your business are low, than I'd recommend opening or starting the business earlier and working on your business plan later or in parallel.

Gavin Wilson is an independent business consultant and bookkeeper and the group lead for the Bootstrap Austin Food and Beverage Subgroup.

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