Why You Need a Good Business Plan

Updated: July 09, 2010

There was a time, as referenced by Mr. Smith, when the Small Business Administration (SBA) used to state "…that 50 percent of businesses fail in the first year and 95 percent fail within five years," according to Patricia Schaefer, a writer for Business Know-How. [i] "The latest statistics from the Small Business Administration (SBA) show that ‘two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years.'" The SBA's current belief is more accurately stated, "as a general rule of thumb, new employer businesses have a 50/50 chance of surviving for five years or more."

In The Seven Pitfalls of Business Failure, Schaefer states, "It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future." An emphasis should be on "critical" because without a path to follow, it is easy for any business to fail - and I feel it should be the first on the list.

The business plan solidifies the owner's future vision, how they see the company growing in various stages, what should be done, when, how and by whom is going to get the company to reach and realize that future vision. It is the foundation of the company and anyone can go to it and see what is next on the list and at least some guidance on how to get it done. While some fall prey to the online, do-it-yourself (DITY) formats or templates, they do not go into sufficient detail in accurately and faithfully developing a living, working, constitution and map of the business now, what it should look like in the future and most important (and usually left out) how the company is going to get there. While I cannot divulge my full process for proprietary reasons, I can explain some of the key issues and a little on why they are necessary and probably lead to valid conclusions on why they are omitted from the DITY templates and probably never looked at again.

It is interesting to note here, The Small Business Economy for Data Year 2006: A Report for the President, published by the SBA's Office of Advocacy in December 2007 [ii], begins with a letter to the President that has a paragraph that solidifies the need for planning, especially before embarking on a new business:

"A second chapter from external contributors, by William Gartner of Clemson University and Jianwen (Jon) Liao of the Illinois Institute of Technology, discusses the need for pre-venture planning. They find that nascent business owners who engaged in business planning during the start-up phase and wrote a formal business plan were more likely to open and remain in business. In essence, they suggest that the process of drafting a business plan was essential to the overall success of the venture. While that might seem common sense to many, a debate in recent years has sometimes challenged the need for pre-venture planning as a prerequisite for success. This chapter lends credence to those who suggest that planning matters."

Even though Mr. Smith was a little wrong on his statistics, his warnings ring very true. A lengthy - and rather high understanding level - read as this SBA report is, it is a recommended read for anyone in the consulting business and certainly one that new business planners should scan through for some insight on what works, or at least helps stay the embarrassment of a failure. Even looking at the 50/50 plan of the SBA citing, that would still mean of every 100 businesses started, those without a plan would probably see 50 of them fail within five years - that is 60 months or 120 two-week paychecks they had to make that somehow critical 5th-year mark. It is rather appalling that many of these businesses may not have even started or would have succeeded had they invested the time and effort of developing a "living" business plan. I say "living" business plan because of the second major problem is that many business organizations never again write or rewrite these essential guiding documents. They should be revisited at least annually and for a fast growing or fast failing business, maybe even as frequently as quarterly. They should be the guiding influence of any business.

Before I even start on writing a word on a business plan, there is a time for adjustment - whether it is a 499-person manufacturing corporation or the corner mom and pop candy store or a sole-proprietor starting an online business. This "adjustment" time is essential in pulling together upper and middle managers, or one-on-one with an entrepreneur, and have an "open and insane" brainstorming session to develop a few empirical targets for the organization. It is necessary to develop and establish its future vision, its purpose, its values, its long-term goals. I say "open and insane" because this particular session has no barriers - anything and everything that can be focused and applied to the organization goes - naturally decency and serious thought are required but Robert's Rules of Order are not the meeting guidelines. These ideas, statements and value points will then be presented, ordered or removed to state and develop the reason for the organization. They will help in establishing what it wants to look like in five or so years and sometimes further in out-years. They help establish the organization's core values, values that it expects every employee to hold true in their performance and the general goals necessary to reach that future vision. They will also help in establishing how they want to treat and keep their customers, but also how to keep its employees and provide them with benefits of value and partnership in the company. Writing a good business plan, updating it periodically and investing some time in its development and upkeep is essential for a business to succeed and nurture both its customers and its employees.

[i] Business Know-How. Retrieved July 1, 2010 from their website.

[ii] Small Business Administration Publication. Retrieved July 1, 2010 from their website.

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