In 2011, Do Small Businesses Need a Formal Business Plan?

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I was looking through some old posts and came across one about business plans from January 7th, 2007 and thought it was appropriate to repost it exactly 4 years later.

At the time, there was an article in the Small Business Page of the Wall Street Journal, “Do Start-ups Really Need Formal Business Plans?

The gist of the article was that as an entrepreneur “you’re wasting your time writing a business plan

Back then, I called this irresponsible journalism for the following reasons:

1. Not every entrepreneur has the good fortune to get a business education at Harvard, Stanford, or the Wharton School of Business.

2. Not every entrepreneur is starting up a business that is looking for Venture Capital Funding.

The article failed to capture the fact that the backbone of Small Business in America is still run by the simple non-business education trained people who have a good business idea and are willing to sacrifice their life savings to bake this idea into a profitable business. These are the people who need a business plan to prevent them from losing their or their friends’ and families’ hard earned investment.

I always tell my clients that the reason for a business plan is not to go looking for financing. “You develop the business plan for you. So that you can peel back the onion and really convince yourself that you understand every aspect of what you are setting out to do”.

Also, the local Community Banks or Credit Unions where these entrepreneurs typically get their financing want to see a business plan to be convinced that they can really execute this business idea and make it happen. These businesses are the ones producing revenue on the order of several $ hundred thousand. This is what Small Business America is all about. Not the “LowerMyBill.com” that sells for $300 million.

At the time, I also chatted with a colleague of mine, who had read the article, but had the following comments: “It is my way of thinking that the first purpose of a business plan is not for raising money from outside sources: banks, investors, family, friends, others. The prime purpose is to take thoughts, which are intangible, and put them into a tangible form i.e. something written that can be reviewed, revised, reviewed, revised many times before making the move to take the final step of opening one’s doors.

It has been my experience that as one begins to put down one’s thoughts on paper it becomes evident that there are some “holes” that need filling . . . holes that if not filled will cause the ship (nee the business) to sink. In addition, as one starts to gather the information needed for a plan, one’s ideas are very likely to change. Few businesses, even those with a business plan, end up doing exactly what they originally set out to do.

Strange as it may seem, the product or service may be right, the target customer however might be different from what was first imagined. Or, it could be that the market is right but the product or service does not fit what the market needs or wants. The reason for this is that people going into new businesses either do not know who the potential customers might be for their product/service or they have the wrong product/service for the market they are thinking of.

Going through the process of developing a business plan is necessary even if outside funds are not needed, as it will ultimately show if there is a mismatch between the idea and reality.

So, now, why is it that so many people go into business without doing a business plan? I believe there are many reasons. One reason is that they are not schooled in business but even worse, there are very few tools to ease those who are “uneducated” in the world of business into the planning process step-by-step. Most of the tools are too academic or the book or template for doing a plan looks so ominous, that the step is put aside.”

So do we still really need business plans in 2011 or were the people in the Wall Street Journal right? Give us your thoughts on the subject.

Republished with author's permission from original post.

Jim Smith
YCHANGE International
Jim Smith mentors entrepreneurial start-ups and counsels small to mid sized companies that are looking to expand or are under performing or under capitalized.

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